PepsiCo to Critics: We're Doing Just Fine, Thank You

Consumer-products giant PepsiCo (NYSE: PEP  ) may seem like a boring company, but its history of enriching shareholders is anything but boring. PepsiCo has made its investors boatloads of money over a long period of time, thanks to its effective management, world-class brands, and products that are bought every day across the world in a good economy or bad.

That's the formula that has allowed PepsiCo to provide such impressive returns to investors over the course of its history. The company recently increased its dividend for the 42nd consecutive year. Its track record is evidence of the powerful business PepsiCo operates. For that reason, PepsiCo should keep generating strong returns for a long time to come.

Source: Pepsico.com

PepsiCo: Not in a hurry to shake things up
If you think there isn't much fizz in the soda industry, you'd be right, and that's just how PepsiCo likes it. The company is under pressure from analysts and investors to shake things up, but management has long resisted calls to change strategy just for the sake of doing something.

PepsiCo's major adversary in the soda wars, Coca-Cola (NYSE: KO  ) , announced a partnership with Keurig Green Mountain (NASDAQ: GMCR  ) . Coca-Cola invested $1.2 billion in Keurig for a 10% stake in the company. Together, they will develop an at-home cold beverage system, utilizing Keurig's existing coffee-brewing technology.

At the time, this partnership seemed like the next big hit. But to a certain extent, it seems like Coca-Cola might be afraid of shifting consumer preferences. Consumers are slowly demonstrating a distaste for the sparkling beverages that make up the bulk of Coca-Cola's business because of the high calories and sugar. Even diet drinks, like Coca-Cola's flagship Diet Coke, are facing scrutiny for their chemicals.

The reason why PepsiCo hasn't pursued a similar partnership is that it holds a much more diversified business than Coca-Cola. PepsiCo's revenue mix is evenly split between food and beverages. PepsiCo holds a slew of brands that aren't under as much pressure as soda right now. These include Gatorade, Quaker, and Frito-Lay. Besides which, the likelihood of an at-home cold-soda-beverage platform becoming a smash hit is far from guaranteed.

SodaStream has had such a product on the market for several years now, and it's by no means a widespread phenomenon. The investment represented a drop in the bucket for Coca-Cola from a financial perspective, so it doesn't have much to lose. But it's clear that PepsiCo is in no rush to pursue a similar deal. Nor should it be.

PepsiCo keeping it all in the family
In addition, one of its biggest investors, Nelson Peltz of Trian Fund Management, recently pressured PepsiCo's board of directors to spin off its North American beverage business. Trian, which owns about 1% of PepsiCo, believes that the company could create substantial value for shareholders by pursuing a spinoff by basically separating the wheat from the chaff. PepsiCo's foods business is growing faster than its beverage unit, so Peltz feels the sum of the parts is worth more than the whole.

But PepsiCo's board won't spin off the beverage unit, and rightly so. There's really no reason to. The beverage business isn't growing rapidly, but it's still massively profitable and represents a core brand connection with consumers.

PepsiCo's performance speaks for itself
PepsiCo hasn't bowed to complaints from analysts and investors that its growth isn't impressive enough and that it should do something big to shake things up. The truth is that the company simply doesn't need to spend a lot of money on something that may or may not pan out. It produced 10% earnings growth last quarter and announced a 15% dividend increase in May. Plainly stated, PepsiCo is doing just fine.

PepsiCo has returned more than $60 billion to shareholders over the past decade through dividend payments and share repurchases. This year, it expects to return $8.7 billion to investors, which would represent a 35% increase from last year. It's plain to see that PepsiCo is right on track and doesn't have anything to prove.

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