Thanks to a successful diversification strategy, PepsiCo has safeguarded itself from the declining soda industry. The company now has a foothold in a number of verticals, from energy drinks (Gatorade), juices (Tropicana), breakfast cereals (Quacker), Better-For-Your Snacks (BFY Foods) and dairy products (Wimm-Bill-Dann Foods). PepsiCo now has a large portfolio of quality brands, including 23 individual brands that generate annual sales of $1 billion or more.
Performance
The last ten years have seen PepsiCo pursue a mixed growth strategy via acquisitions, as well as organic growth via the introduction of new products. 2021 was particularly good year for PepsiCo as it was able to clock in revenue growth of 12.9% year-over-year at USD 79.5 billion.
Last ten years average growth in revenue has been 1.9%, however, there has been an acceleration in the last three years, where the average is 7.2%, driven by the acquisition of companies such as Be & Cherry and Pioneer Foods and by organic growth.
In line with revenue, net income of PepsiCo has also been growing, with the ten-year average growth clocking in at around 1.7%. The net margin has been mostly stable, around 10%. However, there was a blip in 2018, when the company reorganized its international operations, and had a one-off tax gain, resulting in a net margin of around 20%.
PepsiCo has kept its strategy of diversifying its revenue away from beverage-only to a more diversified food business. Beverage revenues have dwindled from 52% of net revenue in 2011 to 45% 2021. Carbonated beverages is a declining industry in the developed world, which is moving to healthier alternatives.
PepsiCo’s bet on healthy snacking is waging well, as its recent acquisitions, brands that focus on “more nutritious snacking,” including PopCorners, Smartfood, and Sun Chips, posted double-digit revenue growth.
From USD 8.9 billion in 2011, operating cashflow of the company has grown to USD 11.6 billion in 2011, a CAGR of 2.6%, which is higher than the revenue CAGR of 1.8% during the same period pointing towards effective margin management. The company has not shied away from utilizing its position of power whereas pricing goes, as is frequently mentioned in annual reports.
Dividend Profile
Dividend payout ratio for PepsiCo was 78% for 2021. Baring the one-off in 2018, the dividend payout ratio has been increasing since 2012 when it was 54%.
PepsiCo’s has been consistently increasing its dividends per share for the last 50 years. Owing to growing revenue, cost controls, as well as share buybacks, the company has been able to grow its dividends per share at an average of 8.3% per year over the last ten years.
Growth Prospects
PepsiCo has demonstrated consistent growth over the last ten years. Its strategy of entering new markets, launching new products, and following up with a consistent marketing campaign has borne fruit as it demonstrates continued revenue growth.
PepsiCo’s has ensured growth in the toughest of times such as the Great Recession, and the Pandemic. The company’s revenue grew 10% during the Great Recession (2008), and 12.9% during the pandemic (2021).
The company has long moved away from its beverage-only business to a diversified food company, and has had success doing so. Its acquisition of BFY Foods, is a case in point. BFY Foods is the maker of nutritious snacks such as Popcorners, which come under the category of Better-For-You Snacks, a growing snack food category, especially in the developed markets.
While soda is well passed its heyday in the West, there is still a lot of room for growth in emerging markets, such as India, where double-digit revenue growth is being posted.
Business Risks
PepsiCo operates in an increasingly fluid environment. Consumer preferences continuously evolve due to changes in demographics, consumption patterns, channel preferences (online/offline), concerns regarding packaging, nutrition profile and location of origin of ingredients. Concerns with any of the foregoing could reduce demand.
PepsiCo’s brand image could be adversely impacted by failure to maintain ethical, business and environmental, social and governance practices, human rights, child labor laws, diversity, equity and inclusion, workplace conditions and employee health and safety.
The retail landscape continues to evolve, including continued growth in e-commerce channels and hard discounters. PepsiCo’s business will be adversely affected if they are unable to maintain and develop successful relationships with e-commerce retailers and hard discounters, while also maintaining relationships with our key customers operating in traditional retail channels.
Disruption of PepsiCo’s manufacturing operations or supply chain, including increased commodity, packaging, transportation, labor and other input costs, can adversely affect business. PepsiCo could experience disruption in manufacturing operations and supply chain. Many of the raw materials and supplies used in production are sourced from countries experiencing civil unrest, political instability or unfavorable economic conditions. Some raw materials and supplies, including packaging materials, are available only from a limited number of suppliers or from a sole supplier or are in short supply when seasonal demand is at its peak.
Final Thoughts
PepsiCo’s strategy of capitalizing on the strengths of existing brands, entering growth markets via mergers and acquisitions, as well as playing on market positioning and pricing power has enabled it to grow revenues and dividends consistently over the last ten years.
This trend is expected to continue in the future, as PepsiCo continues to take advantage of growth markets such as LatAm, and APAC and develops profitable new segments.
Consistent innovation is displayed as PepsiCo enters entirely new product categories, based on established distributor relationships, and consumer trends.
The ability of PepsiCo to weather shocks such as the Great Recession, as well as the Pandemic, cemented its reputation as a defensive stock.