3 Reasons to Invest in PepsiCo

PepsiCo currently represents the best beverage play among its peers. Here's why.

Mar 17, 2014 at 2:20PM

The carbonated beverage industry faces headwinds in the form of the healthy-lifestyles movement and market saturation. However, in 2013 beverage and snack-food giant PepsiCo (NYSE:PEP) fared a great deal better than beverage rivals Coca-Cola (NYSE:KO) and Dr Pepper Snapple Group (NYSE:DPS). Why did it outperform its peers, and what makes PepsiCo a buy today?

Snacks and beverages
PepsiCo, like its rivals, sells iconic carbonated sodas such as its namesake cola and Mountain Dew, and noncarbonated beverages such as Gatorade. However, in contrast to its rivals Coca-Cola and Dr Pepper Snapple Group, PepsiCo also sells snacks under well-known brand names such as Cheetos, Doritos, and Ruffles. It also sells cereals, pasta, and rice products under the Quaker brand.

The combined business affords the company scale, giving it exceptional purchasing power. PepsiCo leverages its product diversity to partner up with restaurants such as Buffalo Wild Wings, which can serve Pepsi beverages along with its potato chips and Doritos. Coca-Cola formerly had Buffalo Wild Wings as a customer. However, Coca-Cola couldn't provide the snack and beverage services that PepsiCo can. In addition, PepsiCo can offer benefits to chains such as Yum! Brands' Taco Bell, which sells its Doritos Locos Tacos along with PepsiCo's drinks.

Improving fundamentals
PepsiCo reported a 2013 revenue increase of 1% versus a 0.03%  increase for Dr Pepper Snapple Group, and a 2% decline for its chief rival, Coca-Cola. PepsiCo's snack business helped drive the increase in reported revenue, with snacks gaining volume 3% when excluding items such as acquisitions, divestitures, and currency fluctuations during 2013. Its beverage segment only grew "organic" or underlying volume 1% during that same time frame. Coca-Cola did see its global volume increase 2%, boosted by a 5% increase in its noncarbonated beverages in 2013. However, it didn't possess a growing snack business to move the needle on Coca-Cola's revenue decline. Dr. Pepper Snapple Group fared the worst in 2013 in terms of volume, where both carbonated and noncarbonated beverages declined 2% apiece. Dr Pepper Snapple Group and its shareholders really have it tough when it can't even grow its healthier noncarbonated beverage products.

Sustainable dividend
PepsiCo's dividend sits on solid ground. Last year the company paid out 49% of its free cash flow in dividends. Currently PepsiCo pays its shareholders $2.27 per share per year, and yields nearly 2.8% in dividends. By contrast, Coca-Cola's payout ratio clocked in at 61% in 2013, residing a little in the high range. Currently, Coca-Cola pays its shareholders $1.22 per share per year and yields 3.2%. Dr Pepper Snapple Group paid out only 44% of its free cash flow in dividends last year.  The company pays its shareholders $1.64 per share per year in dividends, translating into a yield of 3.1%.

Things to look for
Look for PepsiCo to continue to figure out ways to pair its snacks and beverages in various restaurants, grocery stores, and convenience stores. Its diverse products definitely represent its current strength. Look for Coca-Cola to maintain market share, product innovation, and expansion into emerging markets. Over the long term, carbonated beverages will probably move into a less influential position in Coca-Cola's product portfolio. Dr Pepper Snapple Group's struggles will most likely continue, as it lacks the global presence, distribution infrastructure, and product diversity of the other two companies.

Feel free to add these companies to your Motley Fool Watchlist.

Financial advisors hate this man
Believe it or not, even some of the wealthiest individuals in America fall prey to these elaborate decades-old schemes. These five simple questions will reveal whether your financial advisor is using them as well... 

Can you answer "YES" to these five questions?

William Bias owns shares of Coca-Cola. The Motley Fool recommends and owns shares of Buffalo Wild Wings, Coca-Cola, and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers