4 Worries No One’s Talking About: The Coca-Cola Company (KO), PepsiCo, Inc. (PEP)

Questionable Guidance
Reading PepsiCo’s guidance for the year was a bit like deciphering a secret message with a decoder ring. When a company uses words like “core constant currency” to describe its EPS guidance I begin to get nervous. If you read between the lines of what the company said, you’ll know why.

In 2012, PepsiCo returned $6.5 billion to shareholders through share repurchases and dividends. Assuming all things being equal, investors might expect slightly more in 2013 because of the 5.6% dividend increase. However, the company said they expected to return $6.4 billion. This doesn’t sound like much of a difference, but with a 5.6% higher dividend, share repurchases will have to be curtailed.

In addition, PepsiCo, Inc. (NYSE:PEP) said they expect, “higher interest expense driven by increased debt balances.” In plain English, the company is going to borrow money to return the aforementioned $6.4 billion to shareholders. Since PepsiCo’s debt-to-equity ratio is already 1.05, this means the ratio will trend higher next year. This wouldn’t be a bad thing, except Dr. Pepper Snapple is the only peer with a higher ratio at 1.12. Compared to Coca-Cola’s debt-to-equity ratio of 0.44 and Monster’s debt free balance sheet, this puts PepsiCo in an even more difficult competitive position.

The bottom line is, PepsiCo turned in a quarter with major problems in Asia, the Middle-East, and Africa. The company also had the lowest margin of their peers, and without lower taxes their EPS would have decreased. Given that they are planning on borrowing money to pay dividends and repurchase shares, their second weakest balance sheet is going to get worse. Some things never change, I want to like the company, but there are too many unresolved problems. Given the alternatives, investors should look at PepsiCo’s recent price increase as a profit taking opportunity.

The article 4 Worries No One’s Talking About originally appeared on Fool.com and is written by Chad Henage.

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