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PepsiCo - price hikes drive revenues higher

Pepsi saw organic revenue growth of 14% as full year revenues rose to $86bn.

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Pepsi saw organic revenue growth of 14% as full year revenues rose to $86bn. This reflected growth in all geographies, driven mainly by higher sales prices.

Ignoring currency effects, underlying operating profits rose 10% to $11.5bn as revenue growth and productivity savings offset higher operating costs. Underlying operating margins were broadly flat at 13.9%, despite a double-digit increase in advertising and marketing spend in the fourth quarter.

Free cash flow fell 18%, down to $5.9bn. Net debt improved by $0.6bn to $34bn.

Looking to 2023, the group's expecting organic revenue growth of 6% and, ignoring exchange rates, earning per share (EPS) is expected to grow by 10%.

Pepsi will pay a quarterly dividend of $1.15 per share, and announced plans to buy back roughly $1bn worth of shares.

The shares are up 1.7% in pre-market trading.

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Our view

Pepsi's navigating the cost-of-living crisis like a seasoned captain guiding a ship through rough seas.

Thanks to the group's strong portfolio of brands, it's been able to raise prices without really denting sales volumes. Something not many companies are capable of doing. This resilient sales performance has resulted in strong growth in the top line at a time when consumers are really feeling the pinch.

Despite inflationary headwinds pushing up costs, improved sales and other cost management measures have helped to keep operating margins relatively undamaged.

Even with rising costs set to persist throughout the year, Pepsi expects to deliver strong organic revenue and profit growth. And with a strong track record of delivering, we wouldn't bet against them. We think its ability to thrive can be credited to a laser-like focus on brand quality

The longer-term picture looks good too, thanks to the diversity of Pepsi's top-quality brands - 23 of which generate $1bn or more of sales a year. But unlike rival 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?

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.

Net debt remains high at around $34bn, although it's not too much of a concern at the moment and is trending in the right direction. Nevertheless, it's something to keep an eye on as interest rates remain at high levels.

Overall, we consider Pepsi's variety of brands and history of strong execution a real bonus. Despite free cash flow falling this year, it's still a mammoth $5.9bn so there's plenty in the tank to help pay the 2.8% dividend and fund the buyback. As ever though, shareholder distributions can't be guaranteed. But with PepsiCo currently trading above its long-term average on a price-to-earnings basis, there are heavy expectations on its shoulders to keep delivering on its targets. Depending on how hard an economic downturn bites in its core markets, those targets could start to become more challenging.

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 2023