PepsiCo (PEP 3.62%) is one of the top consumer brands on the planet today. However, the world's largest soft-drink maker behind Coca-Cola (KO 1.50%) could be in trouble because of economic sanctions imposed by Russia -- Pepsi's largest market outside of the United States. You've probably heard the term "geopolitical pressures" thrown around a lot lately. Well, the Ukraine-Russia situation is one such "pressure," and it could affect U.S. companies like Pepsi in a big way.
Problems in the motherland
Russia has banned U.S. and European foods and dairy products for one year as a counterattack to sanctions imposed by the West. In the U.S. food products banned by Russia "accounted for $441.5 million in exports to Russia last year," according to The Wall Street Journal. While that may seem insignificant on a grand scale, these sanctions could negatively impact companies, such as Pepsi, that generate a meaningful portion of their revenue from the country.
Source: PepsiCo.
Russia accounted for more than 7% of Pepsi's net sales last year, according to data from Morningstar. That's saying a lot considering the cola and snack giant's products are currently sold in nearly 200 countries around the globe, Moreover, Russia is PepsiCo's second biggest market outside of the United States today.
The region became a key market for Pepsi in 2010, when the soda and snack giant scooped up Russia's leading food and dairy company known as Wimm-Bill-Dan Foods for a whopping $5 billion. That investment could now be in jeopardy, as Russian parliament has threatened a law that would give the Russian government the authority to seize control of Western assets within its boarders.
Pepsi has made a big bet on the Russian market in recent years, and that could come back to burn them thanks to these geopolitical risks in the region. The company currently boasts nine of the top 50 packaged food and soft drink brands in Russia, as measured by Euromonitor International. However, it might lose its position as a market leader if Russian consumers aren't able to buy Pepsi's products for an extended period.
Source: PepsiCo.
If you're wondering what this means for PepsiCo shareholders, it is something the company has cautioned for some time now. In its 2013 annual report, Pepsi warns investors that its "financial performance could be adversely affected" if the company isn't able to grow its operations in emerging markets like Russia "as a result of unstable political conditions."
At this point, Pepsi's operations in Russia contribute significantly to the company's revenue and profitability -- it earned $4.8 billion in Russia in 2012, and as much as 49% of PepsiCo's net revenue is generated outside of the U.S. today. Therefore, ongoing economic sanctions in this market could crimp Pepsi's profits in the upcoming quarters. However, that doesn't mean long-term investors should dump the stock today.
Still a winning stock
Pepsi should have no problem growing its business and profits over the long haul. Not only does its Frito-Lay business boast 22 brands that each pull in annual sales of over $1 billion, but it also has a presence in other key emerging markets, such as China. Both China and India present growth opportunities for Pepsi outside of Russia. Moreover, Pepsi had already invested $2.5 billion in China at the end of 2013. Ultimately, strength in these international markets over the long term could help offset current weaknesses in Russia.
There are also other reasons for patient investors to like Pepsi's stock despite recent challenges in Russia. The company has generated free cash flow of $1.9 billion so far this year, which means it should have no problem rewarding shareholders through dividends and share buybacks going forward. Pepsi currently pays an annual dividend of $2.62 per share and boasts a dividend yield of 2. 81%. Additionally, the company plans to return $8.7 billion to shareholders this year through share repurchases and dividends.
In a nutshell, investors should certainly be aware of how Russian sanctions could affect Pepsi's operations there, but over the long term, Pepsi should be able to weather these challenges and continue to reward Foolish investors.
