Tag Archive : cash flow

PepsiCo (PEP) is headquartered in Harrison, NY. It was created in 1965 with the merger of two companies; Pepsi-Cola and Frito-Lay. Since this combination of two notably powerful companies in their own right, PepsiCo has gone on to acquire several more varied and great brands including Tropicana in 1998. Quaker Oats in 2001. Through Quaker Oats, PepsiCo would also acquire ownership of the Gatorade brand as well. Recently, PepsiCo purchased Sodastream at the end of 2018, which produces carbonation products that enable you to make fizzy drinks in your own home. PepsiCo is a major international player with sales in over 200 countries and territories all over the world. Hence, they have divided their business into six major entities; Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) PepsiCo Beverages North America (PBNA), Latin America (LatAm), Europe and Sub-Saharran Africa (ESSA), and Asia, Middle-East, and North Africa (AMENA).

A number of factors increase the appeal of PEP to a dividend investor including their great array of brands, powerful international exposure, and long history of uninterrupted dividend growth. A large part of PepsiCo’s strength comes from its incredible number of strong performing brands. Some of the more famous brands include; Pepsi, Mountain Dew, Diet Pepsi, Pepsi Max, Mist Twist, Aquafina Water, Tropicana, Lipton Tea, Gatorade, Quaker products, Lay’s Potato Chips, Cheetos, Doritos, Ruffles, Tostitos, and Fritos. From this dominant product line PepsiCo is able to hit several distinct market segments primarily operating in the beverage and salty food sectors. Take note, although PepsiCo does own all these brands which are widely known in the United States there are a number of additional regional brands sold throughout the world which will be unfamilar to the average American investor such as Mirinda, a Spanish created orange drink. Another great benefit of PEP is their global market reach. According to the 2018 Annual report the U.S. market accounted for 57% of net revenue with the rest of the world accounting for the remaining 43%. So although the U.S. market is dominant as can be expected for an American centered corporation, they are still receiving a significant amount of their revenues from unrelated markets all over the world. Digging deeper into these numbers we can also see that food sales accounted for 54% of net revenue with beverages serving up the remaining 46%. What is the most valuable division of PepsiCo you ask? Although your first guess may be North American Beverages (PBNA), you would be incorrect. The correct answer is Frito-Lay (FLNA) which came in with a significant operating profit of 43% for the entire segment. This blows away the next closest North American Beverages out of the water with a still impressive 20%. Another key factor increasing PepsiCo’s allure to a dividend investor is the long history of dividend increases. As of 2018 it was the 46th year in a row, securing PepsiCo a spot at the table of dividend aristocrats. As of the time of the writing of this post PEP is currently paying a dividend of $3.82 yearly, which accounts for a healthy dividend yield of 3%.

We have been over some of the advantages PepsiCo possesses but what about some of the dangers facing them? There are a number of risks currently facing PEP. Changing consumer tastes, changing laws and regulations, unknown political changes and turmoil, risks and opportunities in emerging and developing markets, and any potential supply disruption. The first potential risk facing PEP is nothing new for any company operating in the consumer sphere. Simply put, peoples tastes change over time, and what once was popular with your grandparents may not be well received by millennials or members of generation Z. These trends will never abate but PEP is aware of them and working to bring forth new product lines to appeal to the tastes of the next generation of consumers. Another potential danger facing PEP is changing laws, regulations, and political climates. One section of this is naturally related to taxes. A change in the tax situation domestically or abroad would certainly impose some hardships on PepsiCo and their bottom line. Additionally, something to consider is laws in some cities and states such as Seattle, WA, and California which have banned single use plastic straws. Assuming that plastic straws are only the beginning, one can wonder how new laws could come into effect banning single servings bag of chips or bottles of PepsiCo beverages and the monetary and time cost to devise new and effective measures to counteract these changes. Thankfully for PepsiCo, this isn’t a current or necessarily a pressing problem but it is something to be aware of moving forward for the cautious investor. On the international front, PepsiCo as a truly global company operating in over 200 countries also takes on additional risks from shifting political whims and fortunes across the entire globe. How will the Brexit situation affect Pepsi-Co’s bottom line? What about variances in the exchange rate between currencies in emerging and developing markets such as Mexico, Russia, India, or China? These are complicated questions. Unfortunately I do not have a crystal ball and can not predict the future but it is still important that we consider these possibilities when reviewing any company. Finally, an additional threat facing PepsiCo is any potential disruption in supply of either raw materials or deliveries of finished products. PepsiCo as a large company producing a great variety of products, requires a large amount of raw materials such as water, juices, food products, plastics for packaging, and fuel for operating facilities and delivery vehicles. Some of these such as energy are cyclical markets with ebbs and flows which can benefit or bite any given corporation in any given year based on the going international rate. Others, such as water or food sources can come from limited sources and changing political situations in individual countries and localities. PepsiCo has been successfully navigating these potential risks for decades now and no foreseeable risk currently appears on the horizon, but once again it is necessary that we educate ourselves on potential downsides and disruptions to the businesses we are considering.

Authors note- I am invested and long PEP. I believe their proven business model and additions to their offerings will continue to perform over time and I look forward to collecting the growing dividend income along the way. The views and opinions expressed in this articles are the authors alone, and are offered for informative and discussion purposes only. Please do your own research and due diligence to decide if this is a company that makes sense for your personal portfolio.

Questions? Comments? Have something you would like to see featured? Please write to me @ Reinvested@yahoo.com.