Many investors are undoubtedly familiar with PepsiCo, Inc. (PEP); its product offerings can be viewed here. It is, after all, a company which sold consumable products in more than 200 countries and territories in FY2021.
While PEP has an entire section on its website devoted to Health & Nutrition Sciences, let's not kid ourselves. PEP's products are not nutritious. I can not imagine anybody in the medical community who would remotely recommend PEP products to people seeking to embrace a healthy lifestyle.
Although PEP boasts that it uses whole grains, fruits and vegetables, dairy, and protein, its processes and formulations extract just about all nutritional value. PEP is all about producing products that people have difficulty consuming in moderation.
Naturally, not every PEP consumer becomes addicted to this extent. Thirty cans of Pepsi a day for 20 years at a whopping $8.6K annually!
Take this one step further. There is an inverse relationship between success and time spent watching other people play sports. PEP product consumption is typically greater by people who watch peak performance athletes; peak performance athletes are highly unlikely to consume PEP products. They know their performance will suffer if they make PEP products part of their regular diet.
Now...some people prefer The Coca-Cola Company (KO) products. Their products are just as harmful as PEP products.
It is not for me to tell people what to eat and drink but if consumers made $118.2B in poor dietary decisions in FY2021, I am going to take advantage of their stupidity (PEP's FY2021 revenue was $79.5B and KO's FY2021 revenue was $38.7B).
My thought process is 'Heads we win' when people consume PEP's and KO's products. 'Tails we win more' when these consumers develop health issues from the long-term consumption of the 'junk' these companies produce AND we own shares in the high-quality healthcare companies that aid the consumers who made poor consumption decisions.
Q2 2022 and YTD Results
I last covered PEP in this February 25, 2021 post. Now that PEP has released its Q2 and YTD results and FY2022 outlook on July 12, 2022, I take this opportunity to determine whether I should add to my PEP exposure' PEP's Q2 2022 Form 10-Q is accessible here.
When comparing Q2 2022 results to those of prior recent quarters, investors should note that:
- The increase in selling, general and administrative expenses for the 12 and 24 weeks ended June 11, 2022, as compared to the 12 and 24 weeks ended June 12, 2021, primarily reflects higher selling and distribution costs.
- In the 12 and 24 weeks ended June 11, 2022, PEP recorded pre-tax impairment charges of $1.4B and $1.6B, respectively. These charges are primarily related to the decrease in the fair value of PEP's indefinite-lived intangibles as a result of the Russia-Ukraine conflict.
- In the 24 weeks ended June 11, 2022, PEP sold its Tropicana, Naked and other select juice brands to PAI Partners for ~$3.456B in cash and a 39% noncontrolling interest in a newly formed joint venture that will operate across North America and Europe. In conjunction with this sale, PEP reported a ~$3.335B gain.
PEP bought Tropicana in 1998 and the Naked juice brand about 10 years later. By 2018, PEP was headed in another direction when it purchased Israel's fizzy drink maker SodaStream for $3.2B; SodaStream is a carbonated drink machine company.
In August 2021, PEP announced an agreement to sell Tropicana, Naked and other North American juice brands to PAI Partners, a French private equity firm; this sale closed in Q1 2022.
The North American portion of the transaction was completed on January 24, 2022 and the European portion of the transaction was completed on February 1, 2022. These sale proceeds have been used to strengthen the balance sheet and reinvest in the business.
In the U.S., PEP will act as the exclusive distributor for the new joint venture’s portfolio of brands for small-format and foodservice customers with chilled direct-store-delivery.
In connection with the sale, PEP entered into a transition services agreement with PAI Partners, under which PEP will provide certain services to the joint venture to help facilitate an orderly transition of the business following the sale. In return for these services, the new joint venture is required to pay certain agreed upon fees to reimburse PEP for its actual costs without markup.
I look at a company's senior unsecured long-term debt and rating outlook to gauge the degree of risk I am assuming as a shareholder.
The current unsecured long-term debt ratings assigned to PEP are:
- Moody's assigns an A1 rating with a stable outlook. From May 16, 2007 to February 23, 2010, an Aa2 rating was assigned. PEP was downgraded to Aa3 until June 25, 2013 at which time it was further downgraded to the current rating.
- S&P Global assigns an A+ rating with a stable outlook.
- Fitch affirmed PEP's A rating on August 12, 2020 but concurrently withdrew its ratings for commercial reasons.
Both ratings are at the top tier of the upper medium-grade investment-grade category. They define PEP as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
These ratings are satisfactory for my purposes.
Dividend and Dividend Yield
PEP has paid consecutive quarterly cash dividends since 1965, and 2022 marks the company's 50th consecutive annual dividend increase; PEP's dividend history is accessible here.
PEP distributed its first $1.15 quarterly dividend on June 30, 2022. Based on the current ~$169.50 share price, the dividend yield is ~2.7%.
In the first half of FY2022, PEP distributed ~$3B in dividends. In comparison, PEP distributed $5.304B, $5.509B, and $5.815B of dividends in FY2019 - FY2021.
As noted in several previous posts, focusing on dividend income and dividend yield metrics can lead to flawed investment decisions. Investors would be better served by focusing on an investment's TOTAL potential return.
The diluted weighted average common shares outstanding in FY2010 - 2021 (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, 1,392, and 1,389. In Q2 2022, the weighted average was still 1,389.
PEP repurchased $0.699B of common shares in the first 2 quarters of FY2022. In comparison, it repurchased $3B, $2B, and $0.106B in FY2019 - FY2021.
PEP's PE during the 2011 - 2021 timeframe is 16.63, 17.46, 19.47, 20.92, 29.65, 22.95, 24.78, 31.75, 15.62, 29.37, and 29.59.
When I last reviewed PEP on February 25, 2021, shares were trading at ~$132. PEP had reported FY2020 diluted EPS of $5.12 thus giving us a ~25.78 trailing PE. On an adjusted basis, PEP reported $5.52 in diluted EPS for an adjusted diluted PE of ~24.
In FY2021, PEP reported a diluted EPS of $5.49. With shares currently trading at ~$169.50, the trailing PE is ~31. On an adjusted basis, PEP reported $6.26 for an adjusted diluted PE of ~27.
In the first half of FY2022, PEP generated $4.09 in diluted EPS and $3.15 in adjusted diluted EPS.
PEP provides guidance on a non-GAAP basis because it cannot predict certain elements which are included in reported GAAP results, including the impact of foreign exchange translation and commodity mark-to-market net impacts. Current FY2022 guidance is FY2022 adjusted EPS of $6.63 which represents a ~6% increase compared to $6.26 in FY2021. Using the current ~$169.5 share price, the forward adjusted diluted PE is ~25.6.
Guidance from the brokers which cover PEP will likely change over the coming days. For now, however, PEP's valuation based on current estimates and the current ~$169.50 share price is:
- FY2022: 21 brokers, mean estimate $6.66, low/high range $6.62 - $6.95. Valuation using the mean estimate is ~25.5.
- FY2023: 21 brokers, mean estimate $7.21, low/high range $6.97 - $7.50. Valuation using the mean estimate is ~23.5.
- FY2024: 12 brokers, mean estimate $7.79, low/high range $7.45 - $8.00. Valuation using the mean estimate is ~21.8.
I consider PEP's valuation to be above a level at which I might consider adding to my position. A valuation closer to the low 20s based on $6.63 is what I deem more reasonable. This would place PEP's price closer to $145ish.
Profit From PepsiCo's Addictive Products - Final Thoughts
When I completed my Mid 2022 Investment Holdings Review, PEP had fallen out of my top 30 holdings. It is entirely possible its ranking, however, may have changed since the end of June as a result of stock price fluctuations.
I am not looking to add to my PEP exposure other than through the automatic reinvestment of dividend income.
PEP is a defensive stock and its share price has held up in recent months. My preference is to add to positions in great companies whose valuations have uncharacteristically retraced to reasonable valuations. This game plan is akin to buying a house when prices plunge because buyers are heading for the exits.
PEP might be a good investment for investors seeking safety and a reliable source of dividend income. I just do not like its elevated valuation that is likely partially attributed to a 'flight to safety'.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long PEP and KO.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.