Please ensure Javascript is enabled for purposes of website accessibility

PepsiCo Is Done Buying Back Its Stock

By Demitri Kalogeropoulos - Feb 17, 2021 at 8:08AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The beverage and snack giant has other plans for its cash in 2021.

This week, PepsiCo (PEP 0.98%) announced mostly positive news in its fourth-quarter earnings report. The company gained market share in its snack and prepared food segments and suffered just a small volume drop in the beverage division.

CEO Ramon Laguarta and his team issued aggressive growth and earnings forecasts for 2021, too. But investors might not be as happy with Pepsi's updated capital return plans.

Let's take a closer look.

A glass of soda.

Image source: Getty Images.

A strong end to the year

Pepsi's late 2020 results kept it near the top of its competitive niches. Its food segments grew organic sales by 6% thanks to strong demand for brands in the Quaker Foods franchise. This segment is being lifted by more eat-at-home time. At the same time, flat sales volumes in the beverage unit kept Pepsi ahead of Coca-Cola (KO 0.59%), which posted a 3% decline earlier in the week.

Pepsi's broader 2020 growth landed at 4.3%, or more than double Hershey's (HSY 1.47%) expansion pace and far above Coke's 9% slump. The results were better than management had predicted and nearly matched 2019's soaring sales gains. "We ended the year on a strong note," Laguarta said in a press release, "with our beverage business having accelerated while our snacks and food business remained resilient."

Costs are rising

Pepsi didn't do as well on the profitability side of the business. Even though commodity costs plunged, the company shelled out extra cash to fix manufacturing bottlenecks and make COVID-19-related safety changes.

Core profit margin fell by nearly a full percentage point, leading to just a 2% earnings increase for the full year. Coke and Hershey, in contrast, each notched higher profitability in 2020.

Management had some unwelcome news for shareholders with respect to cash return plans, with total returns set to fall to about $5.9 billion from $7.5 billion in 2020. Pepsi is still planning to increase its dividend payment (for a 49th consecutive year), but stock repurchase spending will plunge to almost zero after reaching $3 billion in 2019 and dipping to $2 billion last year. "We do not expect to repurchase any additional shares for the balance of 2021," management said.

PEP Stock Buybacks (TTM) Chart

PEP Stock Buybacks (TTM) data by YCharts

Looking for more growth

The good news is that Pepsi is targeting another year of market-thumping growth, with organic sales rising in the mid-single digits in 2021. That forecast stacks up well against the 2% to 4% boost that Hershey is forecasting. Coke is looking for a bigger pandemic rebound, meanwhile, after sales fell 11% last year.

Pepsi is also predicting that core earnings will rise at the same pace as sales, effectively ending a two-year slide in operating profit margin. Success on this score, plus the extra cash on hand from reduced stock repurchase spending, would give management a flood of resources it could direct toward growth initiatives and large brand acquisitions. Shareholders have to hope that these moves create plenty of value for the company over and above the returns they could get from share buyback spending.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Pepsico, Inc. Stock Quote
Pepsico, Inc.
$171.77 (0.98%) $1.66
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$64.68 (0.59%) $0.38
The Hershey Company Stock Quote
The Hershey Company
$212.61 (1.47%) $3.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.