Inflation at the grocery store has been hitting consumers' wallets hard since last year. While 2020 and 2021 saw minimal gains in food-at-home prices, according to the U.S. Department of Agriculture, prices soared 11.4% in 2022. Inflation has slowed this year, but food-at-home prices (grocery store and supermarket buys) still jumped 5.8% in May.
In this type of environment, pricing power is everything. A packaged food company that's unable to push prices higher to offset rising costs without suffering a steep decline in volumes is going to have trouble maintaining its margins.
PepsiCo (PEP 0.26%) put its own pricing power on display in its second-quarter report on Thursday. Organic revenue and adjusted earnings per share soared by double-digit percentages, a strong indication that despite higher prices, consumers are not abandoning the company's brands. In the weird economic environment we find ourselves in, defined by elevated inflation, rising interest rates, and a recession that's perpetually just around the corner, PepsiCo stock looks like a safe bet.
Powerful brands
In North America, PepsiCo's snack business was the shining star of the company's second-quarter report. PepsiCo's snack brands include Lay's, Doritos, Cheetos, Fritos, Tostitos, Ruffles, and a host of other well-known names. The company produced year-over-year organic revenue growth of 14% for this segment in the second quarter, almost entirely through price increases. Higher prices didn't ding consumers' appetites for these brands at all. Despite higher prices, volumes were up 1%.
PepsiCo's Quaker Foods segment didn't fare as well, which makes sense given the types of products it sells. Organic revenue for this segment was up just 2% year over year, and volumes were down 5%. Consumers may be trading down and buying less expensive oats-based products.
The beverage business performed well, although there was a meaningful volume decline. The beverage segment recorded 10% organic revenue growth, while volumes were down 4.5%. That's a trade-off that PepsiCo is likely happy to make, accepting a small volume decrease in exchange for a double-digit rise in pricing.
PepsiCo's international segments were also solid performers during the second quarter. Organic revenue, which excludes the impact of currency exchange rates, rose 13% in Latin America, 19% in Africa, Middle East, and South Asia, and 7% in Asia Pacific, Australia, New Zealand, and China. Volumes were mixed, but the company largely kept any volume declines to low levels.
Across its entire business, PepsiCo grew organic revenue by 13%. Convenience foods saw volumes decline by 3%, while beverages saw volumes decline by 1%.
A safe bet
PepsiCo's bottom line grew even faster than revenue. While currency, acquisitions, divestitures, and other one-time items impacted the company's unadjusted results, adjusted earnings per share grew by 15% year over year in the second quarter. Every segment except Quaker Foods grew adjusted operating profit.
PepsiCo sees this strength continuing for the rest of the year. The company raised its outlook for organic revenue growth to 10% for 2023, and it now expects adjusted EPS to grow by 12%. Adjusted EPS is now expected to come in around $7.47 for the full year.
While PepsiCo stock is not cheap, it's also not expensive considering its immense pricing power. The stock trades for about 24 times that earnings guidance. That may seem pricey, but PepsiCo's ability to churn up higher revenue and profit in the current economic environment is a good reason to pay a premium for the stock.
PepsiCo also pays a solid, growing dividend. The latest quarterly dividend of $1.265 per share, which represents a 10% boost over the previous dividend, works out to a dividend yield of about 2.75%. Based on the company's adjusted earnings guidance and this latest dividend payment, the payout ratio stands at about 68%. That's a bit high, but given how quickly earnings are growing right now, it's not a huge concern for investors.
For investors looking for a top-notch company with powerful brands, meaningful pricing power, and a nice dividend, PepsiCo is a great option.