Market Mad House

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Grocery Wars

Will Pepsico Survive?

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I ask will Pepisco survive, because soft drink consumption is plummeting in the United States. For instance, sales of Pepsi in America have fallen by 9% since 2012, Quartz estimates.

However Pepisco (NYSE: PEP) revenues grew by 2.23% in the quarter ending on 15 June 2019. In addition, Pepisco revenues rose from $12.884 billion on 23 March 2019 to $16.449 billion on 15 June 2019. 

Moreover, Pepsico’s gross profit grew from $7.199 billion in March 2019 to $9.134 billion in June 2019. Thus, Pepisco is growing even as demand for its flagship product falls.

Impressively, Pepsi’s quarterly operating income grew from $1.991 billion to $2.924 billion between March and June 2019. Plus, the quarterly net income grew from $1.413 billion to $2.035 billion in the same period.

Why is Pepsico Making More Money?

Why is Pepsico making more money as the demand for soda falls? The answer is simple, Americans are buying more canned and bottled drinks than ever but less soda.

Notably, Eurmonitor estimates U.S. sales of carbonated water grew by 88% between 2012 and 2018. Meanwhile, sales of flavored water grew by 72% during the same period. Predictably, Pepsico bought the sparkling water and seltzer maker SodaStream for $3.2 billion in 2018, CNN Business reports.

Therefore, changes in the soda market are not affecting Pepsi’s revenue and profits. If consumers don’t want want soda, Pepsico sells them seltzer, water, a sports drink, tea, or juice instead.

Consequently, Pepsico’s current stable of brands includes; Lipton’s tea, Tropicana Orange Juice, Gatorade, Aquafina water, Pure Leaf Tea, Soby Tea, Bubly Sparkling Waters, Propel Water, Naked Juice, and Starbucks cold coffee drinks.

In addition, Pepsico sells a wide variety of food and snack products. Popular Pepisco foods include Sabra Hummus, Lay’s potato chips, Frito’s corn chips, Quaker Oats, Smartfood Popcorn, Matador Jerky, Cracker Jack, Life Cereals, and Rice a Roni.

Thus Pepisco can make money whenever you head to the convenience store or the vending machine. If you do not buy a Pepsi, Pepsico can sell you a bag of chips, bottled water, tea, seltzer, or even jerky.

How Much Money is Pepisco Making?

An appealing aspect of Pepisco’s business is its ability to generate cash. For instance, Pepisco had an operating cash flow of $1.388 billion and a free cash flow of $1.048 billion for the quarter ending on 15 June 2019.

Tellingly, the operating cash flow was up from -$345 million on 23 March 2019. In addition, the free cash flow grew from -$785 million on March 32, 2019.

Pepisco is a cash-rich company with $3.3443 billion in cash and equivalents and $291 million in short-term investments on 15 June 2019. Thus Pepsico had $3.734 billion cash and short-term investments.

However, Pepisco’s cash and short-term investments fell from $5.551 billion on 23 March 2019 and $18.129 billion on 16 June 2018. Hence, Pepsi has far less cash than it did last year.

Pepsico is a Good Dividend Stock

Currently, I think Pepsico (NYSE: PEP) is a good dividend stock with a high share price.

Impressively, Pepsico paid a dividend of 95.5₵ on June 6, 2019. Additionally, that dividend grew by 2.75₵ in 2019. In detail, the PEP dividend rose from 92.75₵ on 28 February 2019 to 95.5₵ in June.

Furthermore, Dividend.com credits Pepsico with 46 years of Dividend growth. On 28 August 2019, Pepsico shareholders received a dividend yield of 2.84%, an annualized payout of $3.82, and a payout ratio of 67.1%.

Investors will still make money with Pepsi despite the $134.43 share price, Mr. Market gave the stock on 28 August 2019. Pepsico shareholders could make money because of the good dividend.

Why Pepsico Could be a Value Investment?

I think Pepsico is a possible value investment because the company is diversified and generates a lot of cash.

To elaborate, Pepsico operates in three different markets; snack foods, beverages, and food. Additionally, Pepsico diversifies its lines in each of those markets.

In beverages, for example, Pepsi sells soda, tea, juice, seltzer, sports drinks, coffee drinks and water. Meanwhile, in snack foods Pepsi sells Hummus, Jerky, and a variety of chips. Thus, a person who dislikes Cracker Jack or potato chips can reach for Fritos or Doritos.

Cleverly, Pepsi is adapting to a changing market rather than resisting changes. Rather than ignoring healthy beverages, Pepsico is selling them. In addition, Pepsi is adding to its line of snack foods. Instead, of losing market share to changing tastes, Pepsi makes more money by catering to those changing tastes.

Is Pepsico Recession Proof?

Interestingly, I think Pepsico is recession proof because it sells low-cost creature comforts. Notably, some observers like Salon’s Boby Hennelly and U.S. Senator Liz Warren (D-Massachusetts) believe a bad recession is imminent.

To explain, even the poorest citizens can still afford a bag of Fritos or a can of Pepsi. Hence, Pepsico still makes money from those people if they can no longer afford Sabra Hummus.

Under these circumstances, Pepsico can profit from either recovery or recession. In recovery, people will buy more Soby or Sabra Hummus. In recession, they will buy more Lipton Tea, Lay’s potato chips, and Diet Pepsi.

Therefore, Pepsico (NYSE: PEP) could be a good stock to protect your portfolio from economic downturns.

Is Pepisco Amazon Proof?

Intriguingly, Pepsico could be Amazon proof. To clarify, most people purchase chips, soft drinks, bottled water, tea, and jerky from convenience stores or vending machines.

Hence, much of Pepsico’s market will still be there if Amazon (NASDAQ: AMZN) wipes out most brick and mortar stores. People will still buy Pepsi and Doritos from vending machines and jerky and Aquafina from convenience, even if they order everything else online.

Hence, Pepsico is one consumer brand company that provides some protection from the Retail Apocalypse. Only, a few of its products like Rice-a-Roni and Sabra Hummus are grocery store brands.

In the final analysis, Pepisco (NYSE: PEP) looks like a fairly safe value investment for a chaotic and rapidly evolving consumer brands market. However, I will wait until PEP’s price falls a little to buy it.