PepsiCo’s Total Returns – Future Growth Prospects
PepsiCo, Inc. (NYSE:PEP) is targeting 9% constant-currency adjusted earnings-per-share growth in fiscal 2015.
The company is focusing on raising margins through leveraging its global scale and increasing efficiency. To this end, the company has undertaken the following projects (quoted from CEO Indra Nooyi’s 3rd quarter 2015 earnings call)
“We have installed packaging automation across approximately a third of our snacks plants worldwide, enabling us to reduce packaging label costs in these facilities by at least 50%.”
“We are restructuring our go-to-market systems. Since the success of our Perry, Georgia, pilot in 2009, we have expanded our geographic enterprise solutions or GES as we call them at Frito-Lay North America to a total of 11 projects, which are now at various stages of deployment across locations in both the US and Canada. The consolidation of this plant and distribution networks will result in scale that enables economic implementation of automated order picking, the reduction of distribution centers and a highly efficient direct-to-store delivery system directly from our plant.”
“We’re optimizing our global manufacturing footprint. Since 2010, we have reduced the number of company-owned beverage plants in North America by 23%. At the same time, we’ve increased our capacity utilization by 20%.”
PepsiCo’s efficiency programs are working. The company has increased operating income per employee by 9% in the last 3 years.
The company’s long-term growth driver is global population growth and continued global expansion. PepsiCo currently generates 62% of its operating income in North America.
This means that the company has only just begun to tap the potential of international markets for its products. Over the long run, PepsiCo will grow as long as it is able to build (or acquire) brands that consumers want to eat and drink. Global population growth will drive long-term demand for food and beverages.
PepsiCo’s Total Returns – Expected Total Returns
PepsiCo has grown earnings-per-share at 4.7% a year over the last decade.
While this level of growth is not terrible, it isn’t in line with what investors should expect from PepsiCo. PepsiCo should be able to manage faster earnings-per-share growth over the next several years.
I expect PepsiCo to generate earnings-per-share growth of 7% to 9% a year over the next several years from the following sources:
– Share repurchases of 1.5% per year
– Margin expansion of 2% to 3% per year
– Revenue growth of 3.5% to 4.5% per year
In addition to earnings-per-share growth, PepsiCo also pays a 2.9% dividend yield. The company’s near 3% dividend yield combined with 7% to 9% expected earnings-per-share growth gives investors in PepsiCo expected total returns of 10% to 12% per year over the next several years.
Final Thoughts on PepsiCo
PepsiCo is a high quality business with a long history of strong growth and solid future growth prospects.
The company’s underlying businesses remain healthy, and the stock appears to be trading around fair value at current prices. PepsiCo is ranked in the Top 25% of long-term dividend stocks using The 8 Rules of Dividend Investing.
The company’s solid expected growth, above average yield, and low stock price standard deviation make PepsiCo a low risk investment with double-digit total return potential.
Disclosure: None
