Nice: Refreshing PepsiCo

Let me get something out of the way up front. I own shares of Coca-Cola (NYSE: KO  ) . Because of that, I tend to badmouth PepsiCo's (NYSE: PEP  ) products to my friends. I'll say things like, "Oh, come on! How can you drink that horrible-tasting Pepsi when there's a delicious can of Coke right over there with your name on it!" Or: "Minute Maid is the most delicious orange juice on the planet ... don't drink any other breakfast juice!" Hey, I'm a shareholder who defends his investment at the street level.

Even so, I can be objective when the time calls for it. In keeping with the holiday spirit, allow me to proclaim that, yes, as much as it might nauseate my stomach to say so, individual investors may put PepsiCo on their "nice" list of potential investment ideas. See, I can do it.

Coke has incredible brand equity, but so does Pepsi. People around the world love its portfolio of beverages -- indeed, not only does the company sell tons of cases of its flagship carbonated product, but it also moves a large amount of such items as Aquafina water, Gatorade, and other refreshing liquids. It is a staunch competitor of the crimson can that I love so dearly -- as well as of Cadbury Schweppes (NYSE: CSG  ) and many private-label brands -- and it is not to be underestimated.

And I have no doubt you've heard the little joke on Wall Street -- the one that says PepsiCo is a snack-food company that dabbles in soda on the side. PepsiCo, you see, owns Frito-Lay. It's all quite synergistic; after all, eating a bunch of salt-laden potato chips is an activity that begs for a cool dose of a carbonated concoction. And Frito-Lay has been quite successful over the years; it has allowed the company to not get down on itself for not decisively beating Coke in the cola wars -- indeed, the maker of such delicious guilty pleasures as Doritos has been a key growth driver and will continue to be.

To get a feel for how PepsiCo might fare in the future, it's not a bad idea to sample cash flow data from the most recent 10-K. Numbers are in millions.

FY 2003

FY 2004

FY 2005

Cash From Operating Activities

$4,328

$5,054

$5,852

Capital Expenditures

$1,345

$1,387

$1,736

Free Cash Flow

$2,983

$3,667

$4,116

Dividends Paid

$1,070

$1,329

$1,642



PepsiCo generates lots of free cash flow and likes to share it with stockholders. In May 2001, the quarterly payment stood at $0.15 per stub. Today, that payout is equal to $0.30 per stub -- that's a double in five years. Going forward, I'd expect more dividend increases. PepsiCo will continue to innovate with salty snacks and quenching beverages, and it will thereby ensure growth of cash flows.

Well, that was tough, but I did it. Yes, Virginia, PepsiCo is a nice investment idea. (But so is KO!) The key here is to dollar-cost-average your way to a decent chunk of change over time, making regular additions and reinvesting all dividends. There will be bumps along the way, I'm certain, but I believe that this beverage maker-cum-potato chip purveyor will stand the test of time.

Refresh your investing intellect with more Takes on PepsiCo:

There's a whole world of naughty and nice out there!Take a lookat the rest of the bunch.

The battle between Coke and Pepsi is almost as epic as the battle between growth and value. Coca-Cola is anInside Valuerecommendation. To see why, take a free trial.

Fool contributor Steven Mallas owns shares of Coca-Cola. As of this writing, he was ranked 2,171 out of 16,877 investors in Motley Fool CAPS. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.


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