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PepsiCo - Still healthy results

Nicholas Hyett | 15 February 2019 | A A A
PepsiCo - Still healthy results

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PepsiCo Inc. Comm Stk US$ 0.0166

Sell: 143.95 | Buy: 144.03 | Change 1.01 (0.71%)
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Pepsi saw underlying revenues rise 3.7% year-on-year to $64.7bn, with sparkling 4.6% growth in the final quarter. Core earnings per share rose 9% at constant exchange rates to $5.66.

The full year dividend rose 3%, representing the 47th consecutive annual dividend increase.

The shares were broadly flat in pre-market trading.

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Our view

As the owner of the world's second largest cola brand, at first glance Pepsi looks like Coca-Cola writ small. But Pepsi's annual sales are actually twice that of its more famous rival.

Like Coca-Cola, Pepsi has a diverse mix of top quality brands - 22 of which generate $1bn or more of sales a year. But unlike Coca-Cola, it doesn't limit itself to soft drinks.

PepsiCo's products include snack brands such as Walkers and Doritos, and even some unexpected names - Quaker Oats anyone?

The group's got a laser-like focus on brand quality and margins, and recent results have been good. It's not done yet either. Pepsi's looking to deliver 4-6% annual revenue growth and a 0.2-0.3 percentage point improvement in margins over the long term.

Recent years have seen a concerted effort to focus on Pepsi's healthy credentials. That might seem a bit odd for a company whose main business is crisps and soft drinks. But consider for a moment that Pepsi MAX has been the focus of all Pepsi advertising in the UK since 2005, and perhaps it's not so surprising.

In 2017 the 'better for you' and 'good for you' product categories accounted for 50% of the Pepsi portfolio, compared to just 38% in 2006. That could serve it well in an environment where consumers are increasingly health conscious.

Pepsi's business model varies considerably by region. It'll manufacture products in some markets, while in others it hands over almost complete control to a licencing partner - such as Britvic in the UK. On the one hand that makes Pepsi more capital intensive, increasing risk. But it's also allowed its manufacturing processes to benefit from scale, with a $1bn in cost savings planned for every year out to 2023.

A portfolio of high quality brands has helped Pepsi grow the dividend every year since 1971 - a formidable record even if it may not be repeated in the decades ahead. PepsiCo currently offers a yield of 3.4%.

Pepsi's variety of brands and focus on healthier options are clear attractions compared to rival Coca-Cola. Time will tell if the less focussed, but perhaps more forward thinking, approach delivers results in the long run.

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Full Year Results

Pepsi's largest division, the Frito-Lay North America snacks business, saw operating profits rise 4.5% in 2018 - accounting for around 42.7% of the group total. That reflects revenue growth (including 1% volume growth) and productivity savings.

The other two North American divisions,Quaker Foods North America and North America Beverages (NBA), both saw operating profits fall, with NBA seeing a 16% decline. That was largely down to increased operating costs, including higher commodity prices.

The three divisions with emerging market exposure all delivered positive profit growth - with Latin America up 13%, Europe Sub-Saharan Africa up 4%, Asia, Middle East and North Africa up 9%.

Free cash flow in the year was $7.6bn.

2019 is expected to see 4% revenue growth, with earnings per share falling approximately 1% following asset sales and refranchising in 2018.Free cash flow is expected to be $5bn, after $4.5bn in capital expenditure, with total cash returns to shareholders of $8bn.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.