PepsiCo (PEP) is one of the largest food and beverage companies on Earth, with a gigantic portfolio containing some of the most well-known brands in the world. These include Pepsi, Doritos, Quaker, Cheetos, and Mountain Dew, among several household names.
PepsiCo’s ongoing performance during the current volatile environment full of uncertainty reflects the qualities of its underlying portfolio. Due to PepsiCo owning a mature portfolio of consumer staples, the company generates predictable revenues that are less correlated with the underlying dynamics of the overall market.
The inflationary environment, for instance, can potentially weaken consumer spending, especially if it persists at its current levels. However, consumers are likely to reduce spending on discretionary goods and services before they stop buying their favorite snacks.
Thus, PepsiCo’s investment case currently features a much more fixed risk profile relative to high-growth I.T. or consumer discretionary stocks. Despite the overall turmoil in the market, PepsiCo stock is flirting with new all-time high levels, which illustrates this rationale.
The company’s latest results came in quite strong, paving the way for another quite profitable year. However, despite the fact that investors find comfort in PepsiCo’s robust financials, I caution that shares are somewhat overvalued at their current levels. Accordingly, I am neutral on the stock.
Vigorous Results
Despite the ongoing pressures that could affect PepsiCo’s financials, including inflationary pressures and supply chain bottlenecks, the company’s latest results demonstrated robust operations.
Revenues increased 9.3% year-over-year to $16.2 billion in Q1, retaining strong momentum from last year’s annual sales.
In fact, organic revenue growth came in at 13.7%, demonstrating the resilience of PepsiCo products’ brand value, which allowed the company to efficiently grow its market share in both the macro-snack and savory snack categories, especially in emerging markets.
Specifically, in Africa, the Middle East, and South Asia, total revenues rose organically by 18% year-over-year. Latin America, another emerging market for PepsiCo, reported an even more impressive organic revenue growth of 22%.
Considering the growth trajectory in emerging markets over the past several quarters, these regions are likely to continue to serve as a terrific growth avenue for PepsiCo in the medium term.
Core constant-currency EPS increased by 7% as the company mitigated the impact of inflationary forces by concentrating its efforts on holistic cost management initiatives, and revenue management capabilities.
If needed, however, I believe that the company should be able to pass on any additional costs to the consumer, as its products are relatively inelastic. That is, only if cost management initiatives are not able to fully offset rising inflationary pressures moving forward.
Amid Q1 results coming in line with previous estimates, management continues to forecast organic core EPS of $6.63, implying a 6% growth year-over-year over Fiscal 2021’s core EPS of $6.26.
In my view, this could be a slightly conservative estimate, as EPS is also being boosted by PepsiCo’s accelerating stock repurchases.
Capital Returns
Following last year’s results, PepsiCo had announced a new $10-billion buyback program to be completed through February 2026.
The company has already started utilizing it, as it repurchased $193 million worth of stock during Q1, a significant increase from $106 million in the comparable period last year.
The company expects to return around $1.5 billion through share repurchases in Fiscal 2022, implying that buyback volumes will accelerate through the year. It also means that buybacks will accelerate further between 2023 and 2026, assuming the company intends to exhaust the program’s capacity.
Regarding PepsiCo’s dividend, the company boasts 50 consecutive years of annual dividend increases. Thus, the company is rightfully included in the elite S&P 500 Dividend Aristocrats Index.
The 50th consecutive increase came in last February, when the company announced a 7% increase in its annualized DPS to $4.60, effective with June 2022’s dividend payment.
An annual dividend per share of $4.60 indicates a payout ratio of around 69.3% based on management’s fiscal 2022 EPS guidance. Considering that the company’s EPS growth remains rock solid, its dividend growth prospects should remain rather firm and hover in the mid-single digits going forward.
With accelerating buybacks and assertive dividend growth prospects, PepsiCo should sustain investors’ confidence in the stock during the current volatile environment.
Wall Street’s Take
Turning to Wall Street, PepsiCo has a Moderate Buy consensus rating based on seven Buys, six Holds, and one Sell assigned in the past three months. At $179.15, the average Pepsi stock forecast suggests 1.7% upside potential.
Takeaway
Across the board, PepsiCo features several qualities during the ongoing economic environment. The most significant is that the company’s diversified portfolio of iconic brands should keep producing resilient cash flows during the current global turmoil, as reaffirmed by management’s guidance.
Further, the company retains superior pricing power, meaning that if its cost management initiatives can only protect the bottom line so far, it can always charge slightly more to offset the ongoing inflationary pressures.
In my view, the stock is likely to keep performing substantially better relative to the overall market. However, I would argue that investors could be overpaying as they flock to PepsiCo’s shares for shelter.
Based on management’s guidance, PepsiCo is trading at a P/E of 26.6 at its current price levels. This is not exactly an attractive multiple for a company growing the bottom in the mid-single digits. Thus, I am neutral on the stock.
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