Key Risks
The healthy living trend is usually the biggest risk that comes to mind when investors think about Pepsi’s business. Consumers are becoming more mindful of what they are putting in their bodies each day, and government regulations such as California’s soda tax (3) seem to be gaining momentum, potentially serving as a catalyst.
Carbonated soda is arguably the category that is under the most pressure. Fortunately for Pepsi, however, this category accounts for less than a quarter of the company’s total sales. This is not the case for Coca-Cola (see our analysis of Coke here).
By changing product packaging, pricing, and promotion (the three P’s of marketing), I expect carbonated beverages will remain a cash cow for now, albeit with little to no growth.
Pepsi and other snack and beverage giants are doing their best to adopt their products to changing consumer preferences. From introducing new health and wellness brands to investing in more research and development ($754 million last year) to take out sugar, fat, and salt, meaningful efforts are underway.
As Pepsi’s business mix continues evolving, the risk posed from soda should continue declining. Pepsi has seen especially strong growth in its teas, coffees, sports drinks, and water portfolio.
Currency exchange rates are another risk given Pepsi’s high mix of international business. The dollar has been strong this year, weighing on Pepsi’s reported results. However, I don’t expect this factor to impact Pepsi’s long-term earnings potential.
Otherwise, given Pepsi’s balanced portfolio and global presence, it’s hard to identify many risks that could really harm the business. Perhaps the biggest challenge facing management is the task of continuing to deliver solid earnings growth for a company as big as Pepsi.
Dividend Analysis: PepsiCo, Inc. (NYSE:PEP)
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
