Contents
Summary
- PepsiCo Inc. released Q4 and FY2020 results and FY2021 guidance earlier in February 2021.
- The company continues to generate strong Free Cash Flow which enables the Board and senior management to add shareholder value through the repurchase of shares and the payment of dividends.
- PEP has recently completed its share repurchase activity and does not expect to repurchase any additional shares for the balance of 2021. It does expect to distribute ~$5.8B in dividends in FY2021.
- PEP recently announced a 5% increase in its annualized dividend to $4.30/share from $4.09/share, effective with the dividend expected to be paid in June 2021. This represents the 49th consecutive annual dividend per share increase.
- PEP is currently fairly valued but it is not my intent to acquire additional shares.
Introduction
On February 12, 2009 I initiated a position in PepsiCo Inc. (PEP) in one of our retirement accounts for which I do not disclose details. I subsequently acquired additional shares on February 18, 2014, May 31, 2016, and February 15, 2017 and have also continually reinvested the quarterly dividends. In this August 2020 article in which I analyzed all my holdings, PEP was my 27th largest holding at ~1% of our total holdings.
With PEP having relatively recently released Q4 and FY2020 results and FY2021 guidance I now take this opportunity to briefly revisit this company; previous PEP articles can be found here.
Business Overview
Most people are likely familiar to some extent with PEP, however, a good overview of the company can be found commencing on page 4 and to a greater extent on page 31 of the 2020 10-K.
An overview of PEP's products can be found here. Quite surprisingly there is a nutrition section on PEP's website. This is quite startling because PEP products are not synonymous with nutrition. I very, very rarely consume any PEP products and when I have looked at the ingredients on its products, nutritional value is the last thing that comes to mind. It is readily apparent that what PEP deems to be nutritional differs very much from I think is nutritional.
Top line growth has been relatively sluggish in recent years but senior management is committed to reinvigorating its top line. Toward this end, in FY2020 PEP acquired:
- all of the outstanding shares of Pioneer Foods, a food and beverage company in South Africa with exports to countries across the globe;
- Rockstar, an energy drink maker with whom it had a distribution agreement prior to the acquisition;
- all of the outstanding shares of Be & Cheery, one of the largest online snacks companies in China, from Haoxiangni Health Food Co., Ltd.
Q4 and FY2020 Results and FY2021 Guidance
On February 11, 2021 PEP released Q4 and FY2020 earnings and FY2021 guidance; details can be found here.
PEP's Operating Margin for the 2011 - 2020 timeframe has been 14.48%, 13.91%, 14.61%, 14.37%, 15.4%, 15.61%, 16.18%, 15.64%, 15.32%, and 14.32%. While the Operating Margin has remained range bound we must remember that PEP generates annual revenue in the $67B - $70B range so a 1.5% variance, for example, in Operating Margin on ~$68.5B of revenue is in excess of $1B. Clearly, a slight variance in PEP's Operating Margin can be significant in terms of dollar value!
Looking at PEP's cash flow (page 62 of 586 in the 2020 10-K) we see that PEP generated $10.6B of Net Cash Provided by Operating Activities and CAPEX was $4.2B (investments in manufacturing capacity (production lines to meet demand for reformulated packaging), system capacity (route optimization and sales technology), and productivity (harmonization and automation) giving us FCF of ~$6.4B. In FY2011 - 2019 PEP's FCF was ~$6B, ~$6B, ~$7B, ~$8B, ~$8B, ~$8B, ~$7B, ~$6B, and ~$5B. PEP clearly generates ample FCF which can be deployed to enhance shareholder value which includes the repayment of debt when deemed to be the most optimal strategy; page 94 in the 2020 10-K reflects PEP's short and long-term debt obligations. Details of senior notes issued in 2020 and details of PEP's 364-Day Credit Agreement which expires May 31, 2021 can be found on page 95.
In the Statement of Cash Flows on page 62 we see that in FY2020 PEP deployed ~$6.4B toward acquisitions, net of cash acquired, and investments in noncontrolled affiliates. Details of these acquisitions can be found on page 105.
In FY2021, PEP expects total cash returns to shareholders of ~$5.9B, comprised of ~$5.8B in dividends and share repurchases of ~$0.1B. PEP has recently completed its share repurchase activity and does not expect to repurchase any additional shares for the balance of 2021.
Credit Ratings
On May 16, 2007, Moody's upgraded PEP's long-term senior unsecured credit rating from Aa3 to Aa2. This rating was then downgraded to Aa3 on February 24, 2010 and downgraded again to A1 on June 25, 2013; Moody's still assigns an A1 rating.
S&P Global has rated PEP's long-term senior unsecured debt A+ since April 26, 2017.
Fitch withdrew its A rating in August 2020 for 'commercial reasons'.
Moody's and S&P Global's ratings are comparable and are the top tier of the upper medium grade which is defined as an obligor having STRONG capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
The current ratings are investment grade and are satisfactory for my risk profile.
On February 4, 2021, PEP declared a $1.0225 quarterly dividend payable March 31, 2021 for a ~3.1% dividend yield on the basis of the current ~$132 share price; PEP's dividend history can be found here.
When PEP released Q4 and FY2020 results it announced a 5% increase in its annualized dividend to $4.30/share from $4.09/share, effective with the dividend expected to be paid at the end of June 2021. This represents the 49th consecutive annual dividend per share increase.
On the basis of this new dividend and the current ~$132 share price, the forward dividend yield is ~3.25%.
PEP's stock split history can be found here.
The diluted weighted average common shares outstanding in FY2010 - 2020 (in millions of shares) is: 1,614, 1,597, 1,575, 1,560, 1,527, 1,485, 1,452, 1,438, 1,425, 1,407, and 1,392. As noted earlier, PEP has recently completed its share repurchase activity and does not expect to repurchase any additional shares for the balance of 2021.
Valuation
PEP generated diluted EPS of $5.12 in FY2020 and has projected a high-single digit increase in core constant currency EPS in FY2021. Using 8% and 9% we get $5.53 - $5.58 in projected diluted EPS. With shares trading at ~$132 we get a forward diluted PE range of ~23.7 - ~23.9. PEP's P/E has fluctuated widely during the 2011 - 2020 timeframe (16.63, 17.46, 19.47, 20.92, 29.65, 22.95, 24.78, 31.75, 15.62, and 29.37) with the current forward valuation being fair versus attractive/overvalued relative to historical levels.
Looking at adjusted diluted EPS guidance from 21 analysts we see low, high, and mean levels of $5.92, $6.14, and $6.05. Using $6.05 and ~$132 we get a forward adjusted PE of ~22 which is a shade lower than the PE based on GAAP earnings.
Final Thoughts
The fact PEP was our 27th largest holding when I completed my August 2020 portfolio analysis is an indication that I have not viewed PEP as a truly 'core' holding.
I continue to retain my PEP exposure as I look upon this investment as a source of reliable dividend income with the potential for moderate capital appreciation.
Shares appear to be fairly valued and I do not count on any significant expansion in PEP's valuation. Were PEP shares grossly undervalued I would consider adding to my position in a taxable account but with shares currently being fairly valued I have no intention of acquiring additional shares.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long PEP.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
