The beverage industry has long been a multibillion-dollar business with huge dividends. However, the coronavirus pandemic has severely damaged the operations of companies such as PepsiCo, which showed dire losses in Q2 2020 and the largest drop in revenue in 30 years.
Global beverage sales were down 15% as sales in restaurants, entertainment centres, cinemas, and other public places plummeted, which accounted for more than 50% of the corporation’s revenue. The coronavirus did not spare other categories either.
PepsiCo is involved in the production, marketing, and sale of beverages. Unlike its rival Coca-Cola, PepsiCo also sells food and snacks.
Some goods reach consumers through independent distributors and retailers, and some directly through the company’s logistics network. The issuer’s products are also available in most countries globally, although the United States accounts for almost 60% of total sales.
Although the coronavirus crisis affected the company, only the beverage segment suffered, and the snack business became more resilient to the lockdown.
Consumers are now isolated, leaving their homes only in case of dire need. This is what drove the demand for PepsiCo’s food business. PepsiCo’s Frito-Lay North America snacks division grew 7%, while Quaker Foods North America’s revenue grew 23%.
Indicators
PepsiCo is often referred to as a dividend aristocrat. Pepsi has been increasing its dividend for 48 straight years, and now has a dividend yield of approximately 3.0%. Making PepsiCo snacks gives it an edge over Coca-Cola. PepsiCo’s Q2 performance and YTD inventory movement are better than that of Coca-Cola.
As explained earlier, PepsiCo has one undeniable advantage, namely that this company is engaged not only in drinks but also in snacks. PepsiCo’s quarterly reports for the second and third quarters and the past year are much better than that of Coca-Cola. However, given the upside potential and lower price, Coca-Cola shares look more attractive.
PepsiCo has a significant strategic advantage , as evidenced by its revenues, which are nearly double that of Coca-Cola. However, Coca-Cola’s business is more profitable, with operating margins above 27%, while Pepsi’s is below 17%.
One area in which Pepsi has a clear advantage is in dividend payments. Pepsi’s dividend pay-outs are higher, thanks to free cash flow.
Sales of carbonated drinks have been steadily declining in recent years. People are increasingly choosing healthy foods and avoiding high-sugar foods and beverages that contain artificial sweeteners. This trend has led to declining sales for Pepsi.
Market participants are more optimistic about PepsiCo’s results than about its rival Coca-Cola. The market expects Pepsi’s revenue to rise from the snack segment, which is less focused on out-of-home consumption than Coca-Cola, which declined to provide a financial outlook to investors last year, citing difficulty predicting consumer trends under quarantine conditions. The company is expected to show a rise of 5% in organic sales in 2020 while return on cash is forecasted to rise by 7%. PepsiCo is due to report on 11th February.
The Bottom line
To summarize, we note Pepsi has a diversified business that extends to the beverage segment and other products. The 2020 reporting only confirms this path, as during the pandemic, regular sales of drinks were limited. On the other hand, the snack segment shows steady growth, and if PepsiCo starts producing healthy snacks, its future will be secured. The company’s shares are down 6.1% YTD, down 1.8% in the last fiscal year.
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Adnan Abdul Rehman
Regional Market Analyst
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