Tuesday, August 31, 2010

A Solid Yield For A Soft Drink Company

PepsiCo Inc. (PEP) is more than just soda. While PepsiCo is primarily known for its Pepsi cola, the food conglomerate also makes carbonated, non-carbonated drinks, and snack foods. If you have ever eaten snack foods then you have probably eaten a PepsiCo product. Have you ever had Doritos, Cap’n Crunch, or Tostitos? That’s all PepsiCo. Pepsi is responsible for the 7 Up, Frito Lay, Quaker Oats, Lays, Ruffles, Lipton Tropicana, and Aquafina brands as well.

The company has been around forever. Pepsi was founded back in 1890 by Caleb Bradham. Pepsi operates in the highly competitive soft drink market. The company’s chief competitor is Coca Cola which is the largest soft drink company in the world. PepsiCo has managed to differentiate itself from competitors with its large number of offerings in the food and beverage industry. Today, Pepsi generates over $60 billion dollars in sales selling hundreds of brands around the world.

PepsiCo has grown into the behemoth that it is today by making a number of shrewd moves. The first move was merging with Frito Lay allowing the company to enter the snack foods market. Next, the company added Tropicana and Quaker Oaks over the past 13 years. PepsiCo recently agreed to purchase its bottling company, The Pepsi Bottling Group. The merger will lower production costs and save Pepsi millions of dollars on bottling and distribution.

Pepsi is a financially strong company and the management team has done an outstanding job of managing company assets. PepsiCo has a 36.81% return on equity and a 10.28% return on assets. Operating margins and profit margins are impressive coming in at 17.3% and 12.7% respectively. The only issue for Pepsi is its large debt load of $24 billion dollars. This shouldn’t be a problem since the company creates huge amounts of free cash. Pepsi has earned $7.75 billion dollars year to date and has $4.75 billion dollars in cash on the balance sheet.

Shares of PepsiCo currently trade for $63 a share. The stock currently trades at 16 times earnings which is cheaper than competitors Coke and Dr. Pepper. Pepsi should be able to easily maintain its 7% growth rate over the next few years. The stock currently trades at two times book value and 1.7 times earnings growth.

PepsiCo investors are also getting a rock solid dividend. The food and beverage maker has increased its dividend for 38 consecutive years. Shares of Pepsi are currently yielding 3% which is right in line with the trailing dividend yield of 2.9%. The historical yield has been 2.3%. The payout is very reasonable with only 47% of earnings redistributed back to shareholders.

Pepsi is a reasonably attractive stock at its current price. The stock would be an absolute steal at $57.

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1 comment:

  1. Just a small correction -- Pepsico does not own the 7 Up brand. The company makes, markets and distributes 7 Up outside of the US.

    The 7 Up brand is owned by Dr Pepper Snapple.



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