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PepsiCo - growth slows as price hikes hurt sales volumes

Pepsi's fourth-quarter revenue grew organically by 4.5% to $27.9bn...

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Pepsi's fourth-quarter revenue grew organically by 4.5% to $27.9bn. Sales growth was driven by near double-digit price hikes as volumes of food and drink both fell. This meant full-year revenue grew by 9.5%, which was below the group's previous 10.0% guidance.

Underlying operating profit rose 10% to $1.7bn, ignoring exchange rate impacts. This was helped by price hikes and cost-cutting measures.

Full-year free cash flow improved from $5.9bn to $8.1bn, due to more cash being generated by the business. Net debt rose by $0.4bn to $34.1bn.

Pepsi announced a 7% increase in its annual dividend to $5.42 per share.

In 2024, organic revenue is expected to grow by at least 4%. The group also plans to return $8.2bn to shareholders through dividends and share buybacks.

The shares fell 2.2% in pre-market trading.

View the latest Pepsi share price and how to deal

Our view

It was a weak finish to 2023 for Pepsi, as revenue growth slowed to mid-single-digits in the final quarter. Softening demand for the group's famous fizzy drinks meant that full-year revenue landed below the group's expectations.

Missing your own guidance isn't a good thing, especially when you've raised it twice throughout the year. But it goes to show that the cumulative impact of price hikes is becoming increasingly difficult for consumers to stomach, impacting both drink and food volumes.

Cost-cutting initiatives have continued at pace, helping to offset some of the impacts of lower volumes and keep profits growing at double-digit rates. That's impressive but remember, cost cuts are more like a plaster than a longer-term treatment.

Looking ahead, we anticipate easing cost inflation, which should slow the rate of price hikes and revive some demand for Pepsi's products. Growth from a more sustainable mix of price and volume would be welcome.

Longer term, we're not too worried. Pepsi boasts a wide range of top-quality brands. And unlike rival Coca-Cola, it doesn't limit itself to soft drinks. Pepsi's products include snack brands such as Walkers crisps and Doritos, and Quaker Oats.

Pepsi's business model varies considerably by region. It'll manufacture products in some markets, and in others, it hands over almost complete control to a licensing 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.

While net debt is relatively high at around $34.1bn, it's manageable for now. We're monitoring it closely, especially in the current high interest rate environment.

Overall, we consider Pepsi's variety of brands and history of strong execution a real bonus. But both food and beverage volumes have begun moving in the wrong direction. Because of this, we're likely to see the rate of price hikes slow this year, and revenue and profit growth along with it.

Pepsi's valuation sits slightly below its long-term average. But trading at 21.2 times forward earnings puts heavy expectations on its shoulders - meaning the shares could still be sensitive to stock market fluctuations or earnings disappointments. Right now, there are other names in the sector that look more attractive to us.

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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 9th February 2024