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Food and beverage giant PepsiCo (NYSE: PEP) reported better-than-expected quarterly earnings on Tuesday, sending the stock 1.3% higher for the day.
PepsiCo owes its success to a strategy put in place many years ago, which was to diversify the business into snacks. Even within its beverage business, PepsiCo is innovating by investing in healthier brands that appeal to the new generations of consumers.
Americans are taking notice of what they are putting into their bodies, to an extent rarely seen before. That means corporate America must adapt, or risk falling behind the curve. In PepsiCo’s case, management is definitely staying on top of the always-changing consumer landscape.
Price Increases Fuel Earnings Beat
PepsiCo earned an adjusted $1.35 per share last quarter, on $16.33 billion of revenue. The adjusted earnings figure excludes a one-time charge of $0.92 per share, relating to the company changing its accounting practices for its Venezuelan operations.
Sales and profits actually declined last quarter from the same period one year ago. Year-over-year, revenue declined 5%, while earnings per share were down by $0.01 per share. Last quarter was the fourth in a row of falling sales.
However, much of that is due to currency fluctuations. The rising U.S. dollar against international currencies is eroding revenue and earnings growth for most multinational companies. Excluding the effects of foreign exchange, PepsiCo’s organic revenue grew 7.4% and its constant-currency EPS rose 14%.
And PepsiCo’s results still beat analyst expectations. Earnings per share were forecast at $1.26 per share. Analysts expected $16.15 billion of revenue according to estimates compiled by Thomson Reuters. Such a strong beat on both the top and bottom lines is why PepsiCo stock popped 2% immediately after the earnings announcement.
The company also gave investors some good news when it raised its full-year guidance. It now expects 9% growth in constant-currency adjusted earnings, up one percentage point from its prior forecast.
PepsiCo Expands Its Reach
PepsiCo is steadily moving away from its traditional core focus, which used to be soda. As consumers – particularly those in more developed nations like the United States – become more health-conscious, this is rapidly changing.
Indeed, soda sales fell 1% last quarter. Diet soda did even worse, posting a 6.5% sales decline. The decline in soda consumption has equally affected PepsiCo’s core rival, Coca-Cola (NYSE: KO). Coca-Cola’s sparkling beverage case volume is up 1% through the first half of the year, but its total sales are down 1%.
Fortunately, PepsiCo’s other businesses made up for declining soda sales. Organic revenue rose 2% last quarter in both the North American Frito-Lay and Quaker businesses. Total beverage revenue grew 5% in North America last quarter.
PepsiCo’s beverage portfolio includes water, juices and teas, which are growth areas for the company. Some of its non-soda beverage brands include Aquafina and Gatorade.
Strong organic revenue growth was due to a multitude of factors. First, PepsiCo is offering smaller portions for many of its Frito-Lay snack products. For example, the company has been offering Lay’s potato chips in a bag that is two ounces smaller than the previous 10-ounce bag.
PepsiCo is also firing on all cylinders in the emerging markets. Organic revenue rose 33% last quarter in Latin America. Lastly, its earnings were boosted by lower commodity costs across the board, which helped reduce costs for raw materials.
Bank on PepsiCo’s Dividend
PepsiCo generates strong underlying earnings growth, excluding foreign exchange, which provides the company with enough cash to pay a solid 3% dividend.
It also buys back a lot of stock. This year alone, the company plans to return $9 billion of cash to shareholders through dividends and share repurchases.
PepsiCo is the typical “slow-and-steady” dividend stock, and is an ideal holding for a dividend-focused portfolio.
DISCLOSURE: Bob Ciura personally owns shares of PepsiCo (NYSE: PEP).