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.

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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.

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