Pepsico, Inc. (NYSE:PEP), which is generally, known for its soft drinks and
snacks businesses has been in the news for tying up with Buffalo Wild Wings
(NASDAQ:BWLD) which will allow it to sell its drinks at the 975
outlets that the latter has. Considering the fact that the soft drinks market
is in decline due to the changing consumer demands this deal should help the
company offset the decline in revenue from falling sales.
Not only this,
company's highly diversified business means that even as soft drinks sales
decline sales of snacks are on the rise. When these factors are considered
along with PEP's attempts at expansion abroad, its performance in recent
quarters and the perfect dividend history that it has, the company appears to
be an excellent choice.
What the deal with Buffalo Wild Wings Means
PepsiCo recently replaced rival Coca-Cola (NYSE:KO) as the supplier of
beverages to the rapidly expanding Buffalo Wild Wings. This relationship should
prove beneficial to both since Buffalo Wild Wings will not only mention Pepsi's
beverages but also provide a new menu which includes the company's Doritos.
This does not mean that rival Coca-Cola, which currently has a 70% market share
in the US, will lose out to PepsiCo, but it does mean that PEP's products will
now be served in 975 restaurants across 49 states (and Canada), helping PEP
improve upon its current market share.
Further, the agreement will help PepsiCo cushion the revenue decline
caused by a dip in soft drink sales. PepsiCo CEO Indra Nooyi has admitted that
they have been falling 3% annually.
Great diversification, international prospects
The major difference between Coca-Cola and PepsiCo lies in the share of income
that they derive from soft drinks. While Coca-Cola earns 75% of its revenue
from carbonated drinks sales, the figure for Pepsi is just 25%. Rather, the
latter's leading source of earnings growth has been its snack brand Frito-Lay.
Snack sales have been growing in recent years both in the US and abroad.
If we look at the international market, sale volume in Asian countries
like China grew steadily helping Pepsi's Q3 figures. The company is now
focusing upon China, which is expected, to become the largest beverage market
soon and largest snacks market in about a decade according to Forbes. To cash
in on this demand the company plans to invest in Myanmar. In the meantime, it
will try to build up a strong customer base in both snacks and drinks segments
through distributors and also try to create a reliable supply chain for
ingredients like potatoes by working with local farmers. Hence, while Coca-Cola
has apparently stolen a march by opening a bottling plant in Myanmar, Pepsi's
broad based policy should prepare for the company a solid foundation from which
it can rapidly elevate its fair share.
Those vital statistics
Pepsi's CAGR for revenue stands at 8.65% for the last five years,
leading to a leap from $43.2 billion in 2008 to $65.5 billion in 2012. Growth
figures for 2012 show that though soft drinks continue to provide the greatest percentage
of revenue, the sector only provide $2.97 billion in profit. Compare this to
the $3.65 billion in operating profit (about 35% of total operating profit)
that the company earned in the same period from Frito-Lay, and one realizes why
Pepsi's diversification is such a crucial difference between it and Coca-Cola.
Further, whereas Coca-Cola's YTD return stands at 3.82%, Pepsi's figure
is a delightful 15.08%. Indeed, Pepsi's YTD return is considerably better than
the sector's 9.77%.
Finally, Pepsi has been providing rising dividends for 41 years and has
been able to reach its dividend at a CAGR of 9.45% in the last decade.
According to analysts the EPS growth for the next five years should be in the
range of 7.95%. With a payout ratio of 50%, the company should be able to continue
raising its dividend without much difficulty. If that weren't enough, the
company announced a share buyback of $10 billion, which at current prices would
imply a buyback of about 8% of the company's current float.
Investor's decision
Despite the lead that Coca-Cola enjoys in the beverage industry,
PepsiCo's amusing diversification and recent deal with Buffalo Wild Wings puts
it in a far better position vis a vis Coca-Cola. Additionally, the company has
a clear policy regarding international markets and a rise driven by snacks.
These, coupled with excellent statistics indicate that PEP will continue to
grow in the coming years. As such, investors who already have the company's
stock would be advised to "hold" while those looking for a company
with strong dividend growth in this sector would be advised to invest in the company's stock.
Author:
Justin Martin
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