R&D Spending To Help PepsiCo, Inc. (PEP) In Its Growth

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PepsiCo, Inc. (NYSE:PEP) has been one of the companies that focused on research and development to satisfy the consumers. The number of people preferring natural foods or avoiding artificial tastes or flavors or essence is growing thus applying a break on such products sale numbers. Also, that puts the beverage companies to think out of the box to attract consumers and still earn their pound of flush. Pepsi understood the pulse of its consumers better than anyone else and has been coming out with products in line with the consumers’ liking. As the company has been facing the pressure of top line growth from the domestic, the strong Greenback hurts the international sales number. In any case, it is one of the selected companies that provide a consistent dividend, which is also offering a solid yield in the low-interest regime.

Management Remain Confident

One of the positive factors as far as PepsiCo, Inc. (NYSE:PEP) is concerned was that its management remains confident about the current year’s prospects, as well as, the future years. It was not the first time that the company’s earnings convincingly topped the Street estimations by nearly 10%, it did earlier also. However, it has been one of the few companies that always provide the positive surprise to its investors and did not let down the investors. In the recent first quarter too, its adjusted earnings came in at 89 cents a share, which meant eight cents a share more than the Street predictions. Ideally, investors would have liked the beverage food firm to boost its adjusted earnings outlook for the full year after 10% positive surprise.

However, PepsiCo, Inc. (NYSE:PEP) preferred to reiterate its earlier earnings forecast of $4.66 a share for the year 2016. That was a slight disappointment to the investors. None-the-less, everyone knows very well that the company has always been conservative in providing an outlook and perform better than the target sets by itself. Its CEO, Indra Nooyi, put it aptly about the first quarter performance. She attributed the results to the balanced execution of its commercial agenda apart from productivity programs. She claimed that marketing initiatives, as well as, fresh product launches were providing solid organic top line growth. Aside from that, its focus on fueling higher efficiency throughout its operations also contributed to attractive core gross margin expansion significantly.

Investments Are Yielding Results

Investors have reposed confidence in PepsiCo, Inc. (NYSE:PEP), as well as, its rival, The Coca-Cola Co (NYSE:KO) with both the companies share recording gains despite the struggle for top line growth. There were not much of differences between the two if the investors removed the currency impact. However, Pepsi is having an upper hand in the upcoming period because of its snack business, as well as, the North American unit. The company’s first quarter results demonstrated that its North American Beverages and Frito Lay divisions recorded growth though in the lower single-digit. That is a clear-cut indication that its investments in R&D is paying off and would continue to do so with several other products in the pipeline as indicated by Nooyi.

If PepsiCo, Inc. (NYSE:PEP)’s full year 2015 results were taken into consideration, that demonstrated that the North American Frito Lay and Beverages divisions accounted for 56% of its revenues and approximately 75% its operating profit came from these divisions only. The current indications suggest that the division would continue to perform well and there is nothing to suggest any weakness in the region. Also, the region has the potential to compensate the strong Greenback impact if the growth rate accelerates. The change of tactics is proving to be beneficial to the company and would remain so in the long-run.

Pricing Power To Help

PepsiCo, Inc. (NYSE:PEP) could count upon its strong position in the North America and Frito Lay. It has established a sizeable market share, i.e. more than 50%. Therefore, that provides the beverage firm with an option on pricing. The company could invoke the pricing power whenever it wants and that could continue to ensure organic growth in the segment. Once the top line witnessed growth, it is bound to reflect in the bottom line too as the company has been engaged in operational efficiency through cost cutting measures. Therefore, the unit could sustain the growth rate of the top line, as well as, the bottom line.

PepsiCo, Inc. (NYSE:PEP) has not disclosed the amount spent on R&D in its recent quarterly numbers. However, the past suggested that it boosted its R&D by 8%. As a result, the company’s new products generated 9.0% of its total revenue in 2014. Therefore, having tasted success of the R&D, it cannot remain silent and will continue to invest in its R&D for healthier options. Significantly, the company’s nutritional products account for approximately one-fifth of its net revenue.

Dividend Increase

PepsiCo, Inc. (NYSE:PEP) remains attractive on dividend and its yield also. For instance, the latest dividend provided a yield of 2.90%, which was more than the average yield of 2.8% for the five-year period. Its latest dividend rate worked out to $3.01 on an annualized basis. The company, which has been paying a dividend since 1954, has boosted its dividend rate continuously for 44 years. That was reflected in the five-year average growth rate of 7.98% and 9.42% in the three-year period.

However, the concern is that PepsiCo, Inc. (NYSE:PEP) needed to shell out more from its profit currently than in the past. For example, the latest quarter dividend payout was 77.00% of its quarterly profit. That was significantly above the five-year average payout ratio of 59.0%.

Conclusion

The beverage firm is well-placed to deliver solid dividend rate in the upcoming years too. Its spending on R&D is proving to be a beneficial factor in the North American unit. It will remain so in the upcoming period too. Also, the stock is worth on a dividend basis alone. Therefore, it is better to hold the stock in the light of the prolonged lower-interest rate regime.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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  • little Mikey pop Torts

    There is no company that wastes more money on R&D than PepsiCo. As someone all too painfully familiar with their numerous pitfalls and gaffes, I can safely say I would not touch one stock of this company with a ten foot pole.

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