6 Things To Consider Today Before Investing In Pepsi Stock

  • Pepsi sells snacks and beverages while rival Coca-Cola mainly sells beverages.
  • Pepsi resides in a position of market leadership.
  • Pepsi stock is overvalued.

PepsiCo (NYSE:PEP) possesses many qualities that long-term investors should find compelling. It sells a wide range of products and has a history of giving its shareholders hikes in dividends. Pepsi also resides in a position of market leadership. Let’s examine the traits and qualities that make this company worth holding.

Pepsi Sells Multiple Products

Unlike Coca Cola (NYSE:KO), which largely sells beverages, Pepsi sells snacks, such as Frito Lay Potato Chips, and food, such as Quaker Oats, in addition to its liquid refreshments. I always thought that selling snacks represented an excellent strategy for Pepsi, serving as a buffer against declining soda volume. According to Beverage-Digest, carbonated soda volume has been on the decline since 2014. On that note, Pepsi America Beverages’ carbonated soda volume resided in the flat or negative range in every full fiscal year since 2011.

PepsiCo’s Frito Lay North American business represents the only segment that consistently grew operating income over the past five years (see table below). All other areas experienced more significant fluctuations, including falling into negatives ranges in some years. In FY 2014, Frito Lay’s operating income comprised 42% of the company’s total operating income. So far in FY 2015, it comprised 46% of total operating income.

PepsiCo Operating Income Year-Over-Year Growth By Segment
2014 2013 2012 2011 2010
Frito Lay North America 4.6% 6.3% 0.7% 7.3% 8.7%
Quaker Foods North America 0.6% -11.2% -12.8% 7.6% -5.1%
Latin American Foods -2.5% 17.3% -1.8% 7.4% 11.1%
PepisCo America Beverages -3.7% 0.6% -10.3% 17.9% 27.8%
Europe 2.9% -2.8% 9.9% 14.8% 11.2%
Asia, Middle East & Africa (AMEA) -11.2% 57.2% -15.8% 25.3% 1.1%
Corporate Unallocated 5.0% 11.6% 5.6% -7.1% 134.5%
Total Operating Profit -1.3% 6.5% -5.4% 15.6% 3.6%

Source SEC filings and author’s calculations

PepsiCo's Market Position

Pepsi resides in the No. 5 spot in terms of global beverage market share, according to the Bloomberg leaderboard. Moreover, the company owns 24% of the U. S. Liquid Refreshment Beverage Category and 36% of the U.S. Savory Snacks category. I call companies like Pepsi a “foundation of civilization” stock, which means its ubiquity garners economies of scale. This means it can profitably sell products at a lower price. Despite carbonated soda headwinds, the Pepsi brand remains solid. According to Interbrand, Pepsi ranks No. 24 on its 2015 brand list with a brand value of $19.6 billion, representing a 3% increase from last year.

PepsiCo Consolidated Fundamentals

PepsiCo’s growth has been at a slow and steady pace, especially its net income. Over the past five years its revenue, net income and free cash flow grew at a compounded annual growth rate (CAGR) of 9.1%, 1.8% and 10.4%, respectively. So far this year, Pepsi saw its revenue and net income decrease 5% and 28% year-over-year. PepsiCo’s free cash flow increased 3% year-over-year. Adverse currency translations muddy the waters here. When factoring out foreign currency exchanges, acquisitions and divestitures, PepsiCo’s organic revenue increased 3% year-over-year. Organic volume increased 1.5% in PepsiCo’s snack business and its beverage volume came in flat.

PepsiCo's Balance Sheet Analysis

In the most recent quarter, PepsiCo held $10.7 billion in cash and investments, equating to 79% of shrinking stockholder’s equity (due to share repurchases and accumulated other comprehensive loss). Long-term debt increased 11% since the end of FY 2014. It equates to 194% of stockholder’s equity versus 136% at the end of FY 2014. Year-to-date operating income exceeds interest expense by 9.4 versus 10.5 at the end of FY 2014, which is ok.

PepsiCo's Solid Dividend

PepsiCo resides on the dividend aristocrats list, meaning that PepsiCo consistently increased its dividend for at least 25 years. In fact, PepsiCo consistently raised its dividends for 43 consecutive years. The company has paid out a reasonable 56% of its year-to-date free cash flow in dividends. PepsiCo’s dividend equates to $2.81 per share per year, translating into a yield of 2.9% annually.

PepsiCo's High Valuation

Pepsi stock currently trades at a P/E ratio of 30, which compares unfavorably to Coca-Cola’s P/E ratio of 27 (see table below). These companies trade at a high valuation in a risky market. The S&P 500’s P/E ratio comes in at 19, according to Morningstar, which is at a five year high.
PEP stock chart

Pepsi stock price chart by amigobulls.com


Retirees may want to consider Pepsi stock due to its solid dividend. Moreover, PepsiCo’s snack business picks up the slack of its struggling carbonated soda business. However, investors should expect some volatility due to its high valuation. Finally, investors may want to take a small stake in Pepsi stock, while buying more during corrections, more popularly called buying on dips. That way, they could lower the risks arising from valuations while still participating in a run up in the stock price.

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Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

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