A Low Risk Investment

Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

PepsiCo (NYSE: PEP), the multibillion dollar global beverage and snack food company, seems to be having problems of late, particularly in the North American market. Soft drink sales are at an all-time low, and PepsiCo finds itself lagging behind its nearest competitor, Coca-Cola Company (NYSE: KO), with Dr Pepper Snapple Group (NYSE: DPS) coming in at a solid third place.

Recent rumors that Coca-Cola was planning to form a partnership with Monster Beverage (NASDAQ: MNST), the leading maker of energy drinks, upped the ante and added to PepsiCo’s concerns about sales in the U.S. Although it turned out to be a rumor and nothing more, Coca-Cola did sign a deal with Fair Oaks Farms Brands to be the exclusive distributor of their brand of high-protein energy drinks.

With the drop in soft drink sales, PepsiCo is counting on its many other products to make up the difference. The beverage company has widely diversified holdings, including Frito-Lay, Tropicana, Quaker Oats, and Gatorade. In fact, there are at least 22 product brand names in the PepsiCo family, and the company will soon be selling yogurt in an effort to capture the more health-conscious market.

PepsiCo is a dividend yielding stock. In fact, PepsiCo’s dividend growth rate has consistently remained higher than that of Coca-Cola for the past 10 years. Remarkably, the company has paid quarterly cash dividends to its shareholders since 1965. The alluring dividend yield has drawn investors who realize that this is a stable place to stake their money for the long term. But higher prices for ingredients and packaging materials may have an impact on the bottom line in the short term. The company is projecting a 5% loss by the end of the year, but it hopes that there will be a gain into the high single digits by the end of 2013.

PepsiCo CEO, Indra Nooyi, announced plans to restructure the company by cutting 8,700 jobs this year. It is hoped that the move will save as much as $1.5 billion by 2014. Nyooi, who took over as CEO in 2006, has been a disappointment to some investors, as the company’s growth has slowed considerably under her watch. On the other hand, some are applauding what they consider her sound business sense and no-nonsense style.

One of her strategies to gain a larger market share in the snack industry is geared towards healthier snack foods. Her approach appears to be a sound one; the country is trending toward a healthier lifestyle and people are looking for products that contain less salt, sugar, and fat. She is attempting to reinvigorate the company by doubling revenues from healthy foods like cereals and juices. Nyooi also realizes that emerging markets such as India are vital to the growth of the company.  

As it stands, more than 60% of PepsiCo’s beverage sales come from its non-carbonated drinks Tropicana and Gatorade. Over one billion products made by PepsiCo are purchased every day. The company’s snack section has garnered a whopping 39% of the market, an impressive amount when you compare this to its nearest competitor Kraft Foods (NASDAQ: KRFT) and that company’s 11% of the same market. This is one of those companies that shareholders can be confident about future market potential.

Where does all of this leave PepsiCo? Despite what appears to be some bad news, the company is a giant in the market with a $102.95 billion market cap, a solid dividend, and great return on investments. There is a confidence from both analysts and investors about the stability of the company. Even though carbonated soft drink sales are down, PepsiCo is diversified enough to make up and even surpass the loss in that department through sales of non-carbonated beverages and food items.

In the end, it comes down to stability and a sound business plan, and PepsiCo has both. I’m bullish on this stock, and see it as a low risk investment. The price is attractive, selling at $70.87 at the close of market on Oct. 4, and the outlook is good for the long term.

 

 

 

 


muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend Monster Beverage, PepsiCo, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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