5 Reasons to Hold PepsiCo for the Long-Term

PepsiCo is a dynamic snacks and food company that deserves a long-term spot in your portfolio.

Apr 29, 2014 at 6:00PM

A diverse product portfolio, an innovation driven culture, market expansion potential, decent fundamentals, and dividends all represent good reasons to invest in beverage/snack giant PepsiCo, Inc. (NYSE:PEP). Successful investors know that investing with a long-term mentality maximizes your chances of success and owning shares in companies with the above qualities makes this easier. That's exactly what makes PepsiCo, Inc. a solid bet.

Snacks and beverages

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Source: Motley Fool Flickr by Lisa Heaton 

PepsiCo sells not only carbonated sodas such as Pepsi, Mountain Dew, and Sierra Mist but also snacks and foods such as Lay's Potato Chips and Quaker Oats.  This provides PepsiCo with much needed product diversity to shield it from headwinds in its carbonated soda business due to changing consumer preference toward healthier drinks.  PepsiCo CEO Indra Nooyi spoke positively of the "portfolio complementarity" in PepsiCo's most recent earnings call.  As an example, when you go into a convenience store you may pick up a bag of Munchies Snack Mix with your bottle of Pepsi Cherry. As of the most recent quarter, PepsiCo's snack business remained relatively strong, growing year over year reported and organic volume of 2% versus 0% for beverages. 

Innovation rules

Lays Kettle Cooked Lattice Cut Aged Cheddar Black Pepper

Source: Frito-Lay

PepsiCo really believes in innovation. Nooyi highlighted the fact that R&D increased more than 25% in the past three years. She also goes on to discuss that new PepsiCo products comprised nine of the 15 top new food and beverages across U.S. retail channels. Products introduced within the last three years comprised 8% of PepsiCo's revenue in the most recent quarter.  Some of the new products introduced recently include Kay's Kettle Cooked Lattice Cut Chips , Lay's Pops Crisps Salt & Vinegar , and an interesting marketing product innovation twist: three various mystery flavors where customers can vote on their favorite flavor. PepsiCo definitely possesses an innovation driven culture.

Emerging markets
PepsiCo's future depends heavily on the underpenetrated emerging markets. Places like Russia and Brazil experienced double-digit volume growth in the most recent quarter when factoring out foreign currency fluctuations, acquisitions and divestitures. India expanded its underlying or "organic" volume growth in the high single digits. Nooyi, in addressing geopolitical concerns in Russia, said the company possesses good relationships with the government and its businesses.  Moreover, while margins in overseas markets remain below domestic levels, company executives remain confident that PepsiCo can grow and eventually gain the scale to achieve higher margins.  

Fundamentals

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Source: Motley Fool Flickr by Lisa Heaton 

PepsiCo's overall fundamentals remain in decent shape. Its reported revenue remained relatively even versus the same time last year in the most recent quarter.  Its net income increased 13% during that time frame.  "Unfavorable working capital comparisons" resulted in lower operating cash flow and subsequently negative free cash flow for PepsiCo in the most recent quarter, a situation that will most likely self-correct throughout the year.  PepsiCo's balance sheet remains in good shape with its $10 billion in cash and short term investments comprising 44% of stockholder's equity. Its long-term debt to equity ratio resides a little in the high range coming in at 106% of stockholder's equity in the most recent quarter. However, its operating income exceeds interest expense by a safe nine times.

Dividends

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PepsiCo maintains frugal dividend sustainability over the past couple of years. PepsiCo paid out 49% of its free cash flow in the form of dividends in 2013 and 56% in 2012 . Currently PepsiCo pays its shareholders $2.27 per share per year which amounts to a current yield of 2.7%.

Foolish Takeaway
PepsiCo definitely abstains from complacency. Investors should expect PepsiCo to become more of a snack and food company in the coming years. In addition, PepsiCo should achieve a greater footprint in the emerging and developing markets. Long-term shareholders will benefit from hanging onto their shares and collecting dividends while waiting for capital gains. New investors should buy shares in this dynamic company. 

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William Bias has no position in any stocks mentioned. The Motley Fool owns shares of 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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