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

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.

 


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