Can Pepsi Continue Its Success in New Markets?
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PepsiCo (NYSE: PEP) is a snack, food, and beverage company and is one of the top players in the beverage industry. PepsiCo has enjoyed a long history of generating strong financial growth for its investors. With some the globe’s most-recognized brands and a commitment to sustainability, the company was able to generate long-term growth. Let’s look at the company’s ability to sustain its consistently increasing returns.
Dividend and Growth
PepsiCo has a long history of consistently increasing dividends. Recently, the company announced a quarterly dividend of 57 cents a share, representing an increase of 6% over the previous quarter. This is the 41st consecutive increase in its annual dividend. Over the past five years, PepsiCo has been able to increase its dividends by 33.5%. In the trailing 12 months (ttm), its payout ratio based on dividends stands at 55.1%. In the past five years, the company has managed to maintain its payout ratio around 50%.
PepsiCo's stock has shown a delightful surge over the past six months, appreciating by nearly 19%. In the last five years, the stock risen by more than 25% with few shortfalls. At present, the stock is trading at a price-to-earnings (PE) ratio of 21, which is better than the industry average. Its forward PE of 17 indicates that the PepsiCo has strong upside potential.
Recently, PepsiCo announced first-quarter results with core earnings of $0.77 a share, an increase of 12%. At the end of the first quarter, PepsiCo has generated solid organic revenue and double-digit earnings growth. The company’s investments in creating a strong portfolio of balanced food and beverage products enable it to sustain solid top-line growth.
Further, PepsiCo has the potential to generate hefty cash flows. In the trailing 12 months, its operating cash flow stands at $9.9 billion. The company is looking to return $3.4 billion in dividends and nearly $3.0 billion in share repurchases. Its free cash flows are providing adequate cover to dividend payments. In the past 12 months, its free cash flow stands at $7.1 billion while dividends only account for $3.3 billion.
PepsiCo is getting more success in new emerging markets. Like its competitor Coca-Cola, PepsiCo realizes the significance of creating a diversified portfolio of snack products to attract customers all around the globe. Therefore, the company is seeking to enter new markets along with its concentration of improving the productivity and efficiency of its operating system.
To do this, it is making enormous investments into innovation and marketing. Recently, it introduced several new Indian products such as Nutri Poha, a rice dish under the Quaker brand, a mango version of Slice soda and Quaker oats with Indian flavors to attract the Indian consumers. Also, to sustain or gain new market share, PepsiCo is looking to increase its marketing and advertising expense to 5% to 7% of sales.
Additionally, this year, PepsiCo is anticipating saving $900 million as part of a $3 billion productivity program. It is looking to invest these savings to gain share in new markets and to enhance its operating margins. In the latest conference call, PepsiCo confirmed its earlier guidance for 2013. The company is anticipating increasing its core earnings per share by 7%. The company is expecting to grow organic revenue by mid-single digits, consistent with its long-term targets.
Companies in the beverage industry offer consistent dividends with regular raises and steady price appreciation. Coca-Cola (NYSE: KO) is one of the top-notch players in the beverage industry. Coca-Cola offers constantly growing dividends with stable price appreciation. The company is also backing its return with a solid financial position. The company is looking to shift its focus toward franchising. This means Coca-Cola is moving its revenue base more towards fees instead of sales. With the move in revenue generation, I think Coca-Cola will sustain its returns over the long term.
Dr Pepper Snapple (NYSE: DPS) is ranked as the No. 3 player in this industry. Dr Pepper Snapple is a solid company offering a dividend yield of 2.9%. In the past five years, it has been able increase its dividend by 153% along with 75.7% price appreciation. At present, the company is trading at 16.4 times to earnings. Dr Pepper Snapple Group is trading at a discount compared to Coca-Cola and PepsiCo. However, Dr Pepper Snapple Group lacks some of the economies of scale enjoyed by its peers, PepsiCo and Coca-Cola.
PepsiCo is providing stable returns to shareholders over the years. I believe its payout ratio of around 50% is manageable. Its dividends are fully backed by solid financial position. PepsiCo has been able to generate consistently increasing profits. The company is expecting to grow its earnings per share by 7% over the next year. This indicates that the company will keep its history of consistently increasing dividends. With a forward PE of 17.1, the company has potential to keep its upward momentum.
PepsiCo has quenched consumers’ thirst for more than a century. But recently, the company has left shareholders craving more. With increased competition and loss of market share, many investors wonder if this global snack food and beverage giant is simply fizzling out. Are more bland results ahead for PepsiCo? The Motley Fool's premium report on the company guides you through everything you need to know about PepsiCo, including the key opportunities and threats facing the company's future. Simply click here now to claim your copy today.
siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!