PepsiCo Counts Carbs

It started as a humble drink to aid digestion over 100 years ago and has been through both boom and bust. Bankrupted in 1923 and 1931, PepsiCo (NYSE: PEP  ) has made quite a comeback, with 1.72 billion shares outstanding and a market cap of $79.4 billion.

Pepsi has battled stiff competition for market share over the years, most notably from Coca-Cola (NYSE: KO  ) . However, its Frito-Lay division is facing the most recent challenges from the popular high-protein Atkins diet and other low-carb crazes. An estimated 59 million adults in the U.S. are currently controlling their carbs, taking a sizeable bite out of the snack food market -- not to mention, testing Pepsi's flexibility and ingenuity.

Frito-Lay, which accounted for 57% of Pepsi's 2002 sales, has risen to the challenge, though. The snack maker recently introduced Doritos and Tostitos chips boasting half the carbohydrates of the regular chips. The secret? The new chips have less corn, and more soybeans and fiber. The skeptics among you are probably considering eating the bag the chips come in, instead of the chips themselves, as a tastier low-carb alternative. What good are chips without fat and carbs?

However, there are good reasons for the investor to consider Pepsi -- even without the fat and carbs. The Atkins diet may not be here to stay. Dieters tend to be fickle and fads can disappear as fast as a bowl of corn chips at a Superbowl party.

The hard-core snack food enthusiasts, who tend to be young and less concerned with weight, continue to put away 80% of the Frito Lay "fun food" products. The other 20%, who strayed for reasons of diet, may be lured back into the fold if the low carb alternatives prove to be tasty, and later, as the diet trend fades.

Pepsi, with a price-to-earnings ratio of 22, trades at a lower multiple than other consumer blue chips. For example, Procter & Gamble (NYSE: PG  ) is currently trading at a trailing P/E of 25 and Coke's is 28.

Pepsi's current dividend yield is 1.4%, and the board alluded to considering a dividend increase in the spring. Pepsi's also solidly free cash flow positive. Finally, Pepsi has taken several shareholder friendly actions: it's expensing options, limiting the use of options, and revising the compensation packages to make them based more on performance.

There are many reasons for the investor to consider indulging in Pepsi, even if it's not on the menu. After all, Pepsi's been around for 100 years, while fad diets come and go.

J. Graham owns none of the stocks mentioned in this article.


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