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PepsiCo: A Diversified Capital-Return Machine

PepsiCo, Inc. (PEP) is a diversified food and beverage behemoth whose extensive portfolio spans some of the world’s most popular brands. These include Pepsi, Mountain Dew, Quaker, Doritos, Cheetos, and several other household names.

Given that it operates in the consumer staples sector and owns a mature-brand portfolio, PepsiCo generates highly predictable and consistent financials that are usually uncorrelated with the underlying state of the economy. (See PEP stock charts on TipRanks)

This has been proven multiple times during recessions, and was once again showcased during the COVID-19 pandemic. In fact, the work-from-home pandemic has further boosted the demand for home-consumed snacks and beverages. I am bullish on the stock.

Solid Financials

PepsiCo’s performance continued to be robust during Q2, with the company posting excellent financials. Revenues grew by 20.5% year-over-year to $19.2 billion, boosting LTM (Last 12 Month) sales to an all-time high of $74.58 billion.

Organic revenue growth was 12.8%, highlighting the strength of PepsiCo products’ brand value, which allowed PepsiCo to easily penetrate emerging markets.

Specifically, in Africa, the Middle East, and South Asia, revenues grew by 63% versus the previous-year period. Emerging markets should represent a fantastic growth catalyst for the company moving forward.

Following an excellent Q2, management now expects to deliver organic revenue growth of 6% and core constant currency EPS growth of 11% year-over-year for fiscal year 2021. It’s worth noting that apart from the growing revenues and economies of scale, EPS benefits considerably from PepsiCo’s extensive share buybacks.

A Capital-Return Machine

Speaking of stock buybacks, PepsiCo’s overall capital returns have been extraordinary, driving exceptional shareholder value over the years.

The company boasts 49 consecutive years of annual dividend increases, which means it has rightfully earned its place amongst the elite group of Dividend Aristocrats.

Despite its prolonged dividend growth record, the rate of DPS hikes remains quite satisfactory. The latest DPS hike was 5.1%, once again beating inflation, while maintaining a very comfortable payout ratio relative to the underlying EPS.

Specifically, the current annual dividend of $4.30 per share implies a payout ratio of around 70%, against management’s FY2021 EPS guidance of around $5.70. Considering that the company’s organic growth should be sustained for years to come, PepsiCo’s dividend growth prospects remain robust.

Wall Street’s Take

Turning to Wall Street, PepsiCo has a Moderate Buy consensus rating, based on seven Buys and seven Holds assigned in the past three months. At $165.46, the average PEP price target implies 5.5% upside.

Bottom Line

Overall, PepsiCo enjoys various competitive advantages, including a vast portfolio of well-established brands and a global scale.

This ensures optimal shelf space at retailers, and strong pricing power over smaller competitors. The company also possesses the required financial flexibility and expertise to acquire and integrate any competitor brands into its portfolio.

In fact, any product acquired by PepsiCo is likely to become way more profitable, by leveraging the consumer staples giant’s world-class distribution network and operating efficiencies.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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