Over the last few years, the beverage industry has seen a shift in macro-economic events along with changing consumer trends that have forced industry giants like PepsiCo (NYSE:PEP) and Coca-Cola (NYSE:KO) to change their strategy, lay emphasis on healthy offerings, and focus on value generation in overseas markets. Below I discuss four reasons why PepsiCo is well positioned to deliver sustainable growth and will outperform the beverage industry this year.

Earnings top estimates
In fourth quarter of 2013, PepsiCo reported revenue of $20.12 billion from $19.95 billion in the same period a year ago. The company's Q4 net income rose 4.8% to $1.74 billion from $1.66 billion in 4Q12. That works out to earnings of $1.05 per share, topping consensus forecast of $1.01 per share. The better-than-expected show came as the result of higher prices along with CEO Indra Nooyi's aggressive initiatives that boosted sales of new offerings, such as Gatorade Energy Chews and Pepsi Next.

The world's second-largest soft drink maker has been spending more to market brands while focusing to improve lagging beverage sales in advanced markets, such as the US, and regaining market share from Coca-Cola. For full-year 2013, the company reported earnings of $6.74 billion, up 9.06% from net income in 2012. Operating income grew 7.07% in 2013, supported by effective net pricing and planned cost reductions. Moreover, PepsiCo has not just done well in the last quarter but has topped estimates in each of the last four quarters at an average positive surprise of 7.10%.

International growth potential
As consumers become more health-conscious they tend to give up carbonated beverages/sodas for healthier choices. As a result, PepsiCo, along with Coca-Cola, has been facing strong headwinds in the soft drink business in mature markets over the last few years. The company's American division, which generates 69% of its revenues, saw a 2% decline in soft drink business last year. However, profits from Frito Lay and Quaker Foods segments uplifted overall profits from the region. While growth in advanced markets may have dried up, emerging markets, such as China and India, still offer tremendous potential. As a matter of fact, organic revenues in emerging markets grew 10% last year and the trend is likely to continue in the future driven by increasing demand and a rapidly growing middle class in these regions. Accordingly, the company plans to focus more on high growth areas than less profitable regions.

5-year productivity program
PepsiCo has been successfully executing its 3-year cost reduction program that began in 2012. With roughly $2 billion in savings realized through the end of 2013, the company expects to save another $1 billion this year. The company announced a new 5-year, $5 billion productivity program to sustain its approximately $1 billion/year in savings through 2019. The extended targets are likely to draw bottom line growth as the company expands and widen its footprint in emerging markets.

Dividends & buybacks
PepsiCo has a rather strong history of dividend increases. With its recent announcement of a 15.4% increase in quarterly dividend starting in June, the company has increased dividends for each of the last 42 years. Over the last five years, the average payout ratio has been around 50%, but management is targeting 60% with the latest hike. The company also has a strong buyback history, reducing its share count by 8.5% over the last decade. In its recent earnings report, it announced a $5 billion increase in the shares repurchase program. The value represents roughly 4% of company's market cap.

Bottom line
With tremendous growth potential in emerging markets, productivity targets to draw bottom line growth, and an attractive dividend yield of 2.85%, PepsiCo is a fundamentally strong stock with bright long-term prospects. The stock currently has a trailing P/E ratio of 18.1, which is lower than the industry average, not to mention PepsiCo is expected to grow earnings at 3.64% this year, which greater than its industry average of 1.50% for the same period. Analysts' consensus estimates calculate 12-month price target of $89, which is a sizable 13.7% growth.

Rupinder Singh has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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