PepsiCo: A Company That Will Make You Rich Slowly Over the Decades

Having a strategic viewpoint can help you invest better.

Jun 19, 2014 at 6:36PM

Article

Source: Motley Fool Flickr by Chris Mali 

When you own a share of stock you own more than a piece of paper you own part of a dynamic business. Business owners want their businesses to reside in a strategically advantageous position. Let's take a look at the strengths, weaknesses, opportunities, and threats facing beverage and snack giant PepsiCo (NYSE: PEP).

Strengths

Snacks – PepsiCo sells a wide variety of beverages and snacks under well-known brand names such as Pepsi Cola, Mountain Dew, Lay's potato chips, and Quaker Oats. Its product diversity helps the company overcome carbonated soda headwinds brought on by the slow consumer shift toward healthier drinks. In the most recent quarter, overall snacks volume increased 2% versus even keel for beverages. 

Brand recognition – Brands set your company's products apart from the competition. They also serve the purpose of giving your products an identity that consumers can know and love. This can really add value to the company you own. With that said, the Pepsi brand ranked No. 22 on Interbrand's 2013 List of Best Global Brands  and No. 88 on Brand Z's 2014 List of Most Valuable Global Brands.  This means the company's brands help PepsiCo stand out in the global scene.

Fundamental growth – Over the past 10 years PepsiCo grew its revenue, net income, and free cash flow 127%, 60%, and 88% respectively. Frito-Lay served as the only steady grower during that time frame contributing to the company's long-term growth.  PepsiCo free cash flow got helped by the fact that the company held its capital expenditures between 29% and 38% of operating cash flow in the last several years while operating cash flow rose.

Moreover, international growth especially in the Asia, Middle East, and Africa segment contributed heavily to PepsiCo's fundamental growth.  Looking at PepsiCo's most recent balance sheet, cash to stockholder's equity clocked in at 44%.

Dividends – In 2013, PepsiCo paid out 49% of its free cash flow in dividends.  Currently the company pays its shareholders $2.62 per share per year and yields 3% annually. The company raised its dividend for the past 42 consecutive years. 

Weaknesses
Long-term debt –
On the other hand, PepsiCo's long-term debt to equity clocked in at 106% in the most recent quarter which resides a little in the high range.  Interest from long-term debt can choke out profitability and cash flow over the long-term.

Investors should strive to find companies with long-term debt to equity ratios of less than 50%. However, operating income exceeded interest expense by 11 times in 2013 . A good general rule of thumb for safety resides at five times .

Beverages – Beverages represent a current weakness for PepsiCo. Year over year beverage volume remained even in the PepsiCo Americas segment in the most recent quarter when factoring out "non-organic" factors such as currency, acquisitions, and divestitures with carbonated sodas serving as the primary anchor.  

Beverage organic volume even declined 1% in the Asia, Middle East & Africa segment versus 4% growth in snacks in the region. The only exception lies with Europe which saw beverage volume increase 3%.  

Opportunities
Product innovation
– PepsiCo recently came up with some chip flavors such as Cracker Jack'D  chocolate flavored cherry and mixed berry as well as Lay's Air Pops Crisps salt and vinegar flavor . The company's diverse portfolio certainly provides some interesting marketing opportunities by pairing snacks and beverages with one another. People tend to purchase soda and chips together.

Threats
Healthy lifestyles movement –
Recent data points to a shift in consumer preference toward healthier food and drink which means PepsiCo's branded products such as Pepsi and Mountain Dew may suffer in future years as people purchase more of its non-carbonated beverages. In 2013, Pepsi and Mountain Dew experienced a 4% and 2% volume decline in the carbonated soda brand category according to Beverage Digest.

Diet Pepsi and Diet Mountain Dew fared even worse declining 7% and 3%, respectively, during that time. Bottled water and orange juice can be more easily duplicated than Pepsi cola. It also means that the company needs to keep up its innovation to introduce healthier products in the future. 

Foolish takeaway
With a little over $10 billion  in cash and short-term investments, PepsiCo certainly possesses plenty of cash to invest in expansion, product innovation, and marketing. The company's history of boosting dividends will most likely continue subsequently adding to the company's total return potential especially if it keeps innovating.

More stocks like PepsiCo
The smartest investors know that dividend stocks like PepsiCo simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 

William Bias has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers