This week, PepsiCo (NASDAQ:PEP) 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 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 (NYSE:KO), which posted a 3% decline earlier in the week.
Pepsi's broader 2020 growth landed at 4.3%, or more than double Hershey's (NYSE:HSY) 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.
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.