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Pepsi - sales up but costs limit profit

Organic revenue rose 12%, ignoring the effect of exchange rates, with net revenue reaching $25.2bn.

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Organic revenue rose 12%, ignoring the effect of exchange rates, with net revenue reaching $25.2bn. That reflects growth across all divisions, the strongest being Latin America.

However, organic operating profit fell 4%, reflecting higher costs.

Pepsi expects organic revenue growth of 6% for the new financial year, which is at the higher end of the long-term target range.

A 7% increase in the annual dividend was announced, rising to $4.60 per share.

The shares were unmoved following the announcement.

View the latest Pepsi share price and how to deal

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 usually around twice that of its more famous rival.

At the moment, Pepsi is doing what it can to offset some pretty nasty headwinds. These include big increases in commodity, distribution and packaging costs. So while sales are impressive, the bottom line is worse than flat, it's receding. We're inclined to give Pepsi the benefit of the doubt when looking at the long-term, but the medium term is likely to prove tough.

The brighter, longer-term picture is helped by Pepsi's diverse mix of top quality brands - 23 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 crisps and Doritos, and some more unexpected names - Quaker Oats with your fizzy drink?

A laser-like focus on brand quality and margins, have kept profits slowly moving forwards previously. Which has fed into an impressive dividend track record, spanning 50 years. We aren't suggesting dividends are on the chopping block now and past income is not a guide to the income you'll receive in future, but if operating profits are subdued beyond a certain timeframe, shareholder returns could come under fire.

It's also worth considering Pepsi's business model, which varies considerably by region. It'll manufacture products in some markets, 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 thanks to investments in factories and production equipment, increasing risk, but it's also allowed manufacturing processes to benefit from scale.

Debt has crept up, although it's not too much of a concern at the moment, it's something to keep an eye on as interest rates increase.

Overall, we consider Pepsi's variety of brands and history of strong execution a real bonus. However, with the stock on a PE ratio above its long run average, only time will tell if the less focused, but perhaps more appealing business model can deliver the necessary results.

Pepsi key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Fourth Quarter Results (percentage comparisons are organic)

Frito-Lay North America, which makes, markets, distributes and sells brands including Doritos, Cheetos, Ruffles and Lays, saw revenue rise 13%, with net revenue reaching $6.2bn. However, higher transportation, cooking oil and packaging, material, and marketing expenses meant underlying operating profits fell 5% to $1.7bn.

Quaker Foods North America saw underlying operating profit of $193m, which was down 2%, as higher costs offset the benefit of higher prices and cost savings. Revenue rose 9%. It was a similar story at PepsiCo Beverages North America, revenue rose 12% but underlying operating profits were flat.

As the strongest performer, Latin America sales rose 17%, with net revenue of $2.8bn. Underlying operating profit fell 1% as costs again outweighed sales growth.

There was revenue growth in all remaining regions, and profit was flat or positive in these areas, largely thanks to productivity savings.

Free cash flow for the year as a whole was $7.0bn, while net debt was $34.3bn as at the end of 2021.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 10th February 2022