03/17/10 Stockholm, Sweden – New York-based PepsiCo (NYSE:PEP), the international food, beverage, and snack company I’m sure you’re all familiar with, recently had its corporate credit rating downgraded by S&P. It’s been lowered to A from A+.
However, according to Jim Nelson, editor of the Lifetime Income Report, there are still several reasons to be optimistic about PEP:
“Oftentimes, a brand name is a company’s largest asset. Without a strong, recognizable brand name, a business’ product is indistinguishable from its competitors — which narrows its economic moat. That’s why companies like Coca-Cola Co (NYSE:KO) and PepsiCo Inc (NYSE:PEP) have been able to grow at an exponential rate over the past several decades. Today, we’re considering capitalizing on these companies’ growth stories.
“11 months ago, we told readers:
“Coke and Pepsi are both struggling to keep customers buying. Both companies reported a 10% decline in profits during the first quarter.
“In the short term, this could be disastrous for share prices. Over the next 12 months or so, this could also adversely affect income investors. We’re still a ways off potential dividend cuts, but we could see either company level its payments off in upcoming quarters. No one expects this trend to continue forever. These companies should pick themselves back up and continue to grow internationally once the recession subsides.
“Somewhere down the road, we might want to start a position in one of these two.”
“Well, we’re happy to say we were wrong. Both of these companies handled last year’s slower sales like champions. By streamlining operations Coke and Pepsi were each able to maximize profits through growing their margins.
“Last year, when we wrote about the struggles of these beverage giants, we told readers about the consolidation of bottling companies. In April 2009, Pepsi decided to buy out its two largest bottlers. We were optimistic about the company’s long-term prospects from this deal. But we didn’t expect anything positive coming out of it in the short term.
“The improving margins have affirmed that each of these companies are coming out of their downturns. Their restructuring efforts have paid off… Pepsi in particular. Earlier this week, Pepsi announced that it was going to hike its quarterly dividend, as well as spend $15 billion on share repurchases. That’s quite a change from what we were calling for last year, when we suggested Pepsi might level out its dividend payments. This is one instance where we don’t mind being wrong.
“Pepsi’s dividend hike boosts its current yield to around 3% — right in our Legacy Portfolio range. This marks its 38th consecutive dividend increase. And with the buyback plan, we know what the company’s management and board of directors think about its current share price.”
Nelson’s analysis also later points out that Pepsi has been able to bring its payout ratio back to a respectable level of 47% — 51% if you use the new dividend rate. You can read more of Jim Nelson’s research on the company, and subscribe to his Lifetime Income Report, on the Agora Financial research page.
Best,
Rocky Vega,
The Daily Reckoning
[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]
Rocky Vega
Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let’s Go Publications, Harvard Student Agencies, and The Harvard Advocate.
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