Summary
- Dividend Stability and Growth: PepsiCo is regarded as a stable investment, underscored by its consistent dividend growth and status as a Dividend Aristocrat, having increased dividends for over 25 years, which caters to income-focused investors looking for stability.
- Conservative Growth Expectation: Our analysis suggests a modest 5-15% stock price upside in 12 months, based on a conservative revenue growth forecast of 3.8%, reflecting a normalization from the higher growth rates seen during COVID-19 peaks.
- Impact of Quaker Recall: PepsiCo’s Quaker segment recall, due to potential Salmonella contamination, is expected to influence financials into the first half of the year until supply chain normality returns, as stated by CEO Ramon Laguarta.
- Health and Wellness Trends Risk: J.P. Morgan Research anticipates that the growing health and wellness trend and the use of GLP-1 agonists could lead to a decrease in at-home consumption of food and beverages, particularly impacting sugary and high-carb products.
- Quaker Recall Financials: The Quaker recall has significantly impacted operating profit by 19% to $492 million in 2023, with product returns and recall charges contributing a 22 percentage point negative effect, and recovery is anticipated in the first half of the year following the incident.
Investment Thesis
#1: Pepsi is boring, and it’s suppose to be. PepsiCo’s robust dividend yield and history of consistent dividend growth position it as a compelling investment for income-focused investors
- A Dividend Aristocrat is a company that has consistently increased its dividends for at least 25 consecutive years, signaling long-term financial health and commitment to shareholder returns
- Despite the payout ratio fluctuating from the low 50s to the high 90s over recent years, PepsiCo’s consistent dividend growth demonstrates the company’s financial resilience and commitment to shareholder returns, indicating low risk to dividend sustainability
#2: Headwinds has brought Pepsi in a favourable valuation. Again, it’s boring with boring gains, but my reasons for investing is that I’m looking for a company that brings stability in my portfolio.
- We’ve forecasted a conservative 5-15% upside in 12 months. This is driven from a revenue forecast of 3.8% (from $91.5B to $95B) and a P/S around 2.6
- We think 3.8% is pretty conservative since the industry has been coming down from it’s covids highs where Pepsi was touching double digit growth. As you see below, revenue growth has been normalizing and on a downward trend since 2021
- As stated in Pepsi Q4 2023 transcript from Ramon Laguarta, CEO of Pepsi, “We maintain the top line at the upper end for the EPS and we move back to at least four for the top line and there’s a few factors that I think are material.
- One, is the Quaker recall. We had a food safety incident in our Quaker supply chain in the U.S., which has impacted us in November, December, and it will continue to impact us, I think for the — at least for the first-half of the year until we recover our supply chain to normality.
- We’re also seeing some geopolitical events around the world that are impacting some of our markets, which might potentially continue in the first-half of next year.
- And then the third element is we’re seeing a bit of a slowdown in the U.S. both the food category and the beverage category in the Q4. Part of that is slowdown due to pricing and disposable income situation
Risk Assessment
- Med Risk: The rising health and wellness trend, alongside the increasing use of GLP-1 agonists for weight management and diabetes control, presents a risk to PepsiCo’s traditional sugary beverage and snack sales
- GLP-1 agonists are often used as part of a weight loss treatment. GLP-1 stands for glucagon-like peptide-1, which is a natural hormone that helps regulate your appetite and how your body handles blood sugar. As a medication, GLP-1 agonists work by imitating the hormone’s effects: they tell your body when it’s time to release insulin (which lowers blood sugar), stop releasing sugar into the blood, and they slow down how quickly food leaves your stomach, making you feel full longer
- J.P. Morgan Research forecasts that the GLP-1 market will exceed $100 bn by 2030, driven equally by diabetes and obesity usage. Total GLP-1 users in the U.S. may number 30 mn by 2030 — or around 9% of the overall population
- GLP-1 agonists contributing to a trend where users purchase approximately 8% less food and beverages for at-home consumption, potentially leading to a 3% decrease in North American food intake by 2030E, affecting packaged food sales more than grocers due to the latter’s higher-margin fresh food offerings
- Med Risk: The Quaker recall issue that PepsiCo is referring to involves a voluntary recall of various Quaker products due to potential Salmonella contamination. The recall was initially issued on December 19, 2023, and was later expanded to include additional products like Chewy granola bars, puffed granola, granola oats cereal, Cap’n Crunch Bars, and some cereals, among others
- The issue has affected the Quaker Foods North America segment’s operating profit and has been cited as a contributing factor to the decrease in operating profit for that division, which declined 19% to $492 million in the year ended December 30, 2023. The financial impact of the recall included product returns and charges associated with the recall, which had a negative effect of 22 percentage points on operating profit
- The recovery from the Quaker recall issue is expected to take place in the first half of the year, as indicated by PepsiCo’s CEO, Ramon Laguarta, during the earnings call. He mentioned that the impact of the food safety incident in their Quaker supply chain, which started affecting them in November and December, is likely to continue impacting them “for at least for the first half of the year until we recover our supply chain to normality.