Pepsi: The Beverage Stock That's So Much More Than Beverages

Dec.18.13 | About: PepsiCo Inc. (PEP)

Pepsi (NYSE:PEP) is a great stock to have in anyone's portfolio. I believe it is often overshadowed by Coca-Cola (NYSE:KO) simply because people believe Coke is a better product than Pepsi. Those people would be right, Coke has a stranglehold on the soft drink business with Coke and Diet Coke as the two best selling soft-drinks; but would you want to own the top company in a declining market? After 2013's second quarter sales numbers came in, "Coca-Cola Co. said it sold 4 percent less soda in North America, while PepsiCo Inc. simply said its decline for the region was in the 'mid-single digits.' Dr Pepper (NYSE:DPS) sold 3 percent less of the fizzy drinks". Would you want to own a company that had declining revenues in a majority of its business?

Unlike Coca-Cola, who generates about 2/3 of its sales from soft drinks, Pepsi is a much more diversified company. Pepsi owns multiple well known brands such as Frito-Lay, Tropicana, Quaker, Cap'n Crunch and Gatorade; and unlike Coca-Cola, only generates 1/3 of its sales from soft drinks.

These other brands that make up the majority of Pepsi's sales are also in industries with higher margins than soft drinks. In 2012, Pepsi's American Beverage segment made up 33% of its revenue, while contributing 28% to its operating profit. In this same year, Pepsi's Frito Lay North America segment made up a much lower 21% of revenue, but managed to generate 35% of Pepsi's operating profit thanks to higher margins.

For those of you who are still not convinced that Pepsi's diversification into snack food is a great opportunity and are still caught up on the fact that Coca-Cola is winning the soft drink wars, it appears the tables are turning. Just last week, popular and fast-growing restaurant chain, Buffalo Wild Wings (NASDAQ:BWLD), announced that it was making the switch from Coke to Pepsi. The reasoning behind this move? Pepsi has these other brands in its portfolio, Buffalo Wild Wings wants to create new menu offerings using popular Pepsi snacks like Doritos. This is in addition to the already popular "Doritos Locos Taco" being sold at Taco Bell (NYSE:YUM) in 3 different varieties. I believe these are just the start of similar opportunities down the road for Pepsi. With the brand portfolio that Pepsi has, its hard not to imagine a place like McDonalds (NYSE:MCD) offering a Quaker Oatmeal product for breakfast or a Tropicana Orange Smoothie at a place like Starbucks (NASDAQ:SBUX).

Lets see what this diversified portfolio of brands has done for Pepsi over the years. Pepsi was able to grow its revenue at a compounded annual growth rate of 8.65% over the last 5 years, from $43.2 Billion in 2008, to $65.5 Billion in 2012. This is a good pace for a company of this size and slightly outpaced the 8.49% CAGR that Coca-Cola put up over the last 5 years. The growth at Pepsi is set to continue, albeit at a slower pace. S&P predicts sales growth of 1.6% this year and 5% in 2014.

If you compare the first 9 months of 2013's sales to the first 9 months of 2012's sales, you can see exactly where the sales growth came from, and it's not soft drinks.

Pepsi's largest segment, Pepsi American Beverage, which is comprised of not only Pepsi, but brands like Mountain Dew, Sierra Mist, Gatorade, SoBe Life Water and Naked Juice,saw sales drop 1.6% year over year. If you look at where the growth is coming from, the two fastest growing segments are Frito Lay North America, which sells snacks such as Lay's, Fritos, Cheetos, Ruffles, Tostitos and Sunchips; and Latin American Foods, which sells similar products, but exclusive to Latin America. These two segments that are made up solely of foods are the key growth drivers for a company that most still consider a beverage company.

Now lets get to the important part, what this stock can do for us, the shareholders. Pepsi has always returned value to its shareholders as it has been paying and increasing dividends for 41 years, and will continue to do so for the foreseeable future. Below is a chart of the most recent 10 years of dividends:

Pepsi was able to grow its dividend at a CAGR of 9.45% over the last 10 years, even through the ups and downs of the economy. With a current payout ratio of 50%, and EPS set to grow at 7.95% over the next 5 years according to analysts' estimates, there is plenty of room for that dividend to continue growing. But dividends aren't the only way that Pepsi is returning value to shareholders. Earlier this year, Pepsi announced a $10 Billion share buyback over the next 3 years. This would buy back approximately 8% of Pepsi's float at current prices. This, coupled with a current dividend yield of 2.82% show management's commitment to return value to shareholders.


With a large brand portfolio that offers a multitude of growth opportunities, and a more diversified product line than its competitors, Pepsi is the business you want to own. Compound that with the substantial dividend that has been growing for 41 years and a $10 Billion buyback plan and this company looks like a long term buy. But in the short term, I would suggest waiting for a pullback to around $76 for a better entry point.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PEP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.