Investors in PepsiCo (NASDAQ: PEP) just received its biggest update of the year from the snack and drink giant. The fourth quarter report detailed how Pepsi was able to grow during the pandemic in 2020 to gain market share in the food and soda niches. The update also showed why the company has abruptly ended share buyback spending for now, as it aims to end a two-year drop in profitability.
Let’s take a closer look at three questions the company answered for investors.
1. When will costs start to go down?
Pepsi’s 2020 year marked a second consecutive year of declining profitability. This result stands out from its rival Coca Cola (NYSE: KO), which increased its margins even though its sales declined. Pepsi’s profits were also reduced by additional investments in the company in areas such as manufacturing, sourcing and IT.
Management said this cost pressure isn’t going away anytime soon, as it’s a consequence of Pepsi’s new strategy to attack more markets and consumer demographics. “As we turned to more growth strategy,” CFO Hugh Johnston told investors, “were [boosting] capacity.”
2. Why is share buyback spending plummeting?
Pepsi spent $ 2 billion on share buybacks last year, up from $ 3 billion in 2019. Management predicts a more dramatic slowdown this year, with buybacks falling to near zero.
The company said the change does not represent a change in its capital allocation plans, but is simply aimed at consolidating finances after a volatile year of selling. Debt surged in 2020 as consumer spending slumped in early March, and Pepsi joined all of its peers in taking advantage of low interest rates to increase liquidity. The repurchase break reflects his goal of continuing to dividend without pushing the debt lever too high. “We try to balance our debt rating against our cash return to shareholders,” said Johnston.
3. What are the plans for plant-based meat products?
Pepsi provided more details on the new partnership with Beyond the meat (NASDAQ: BYND) which will give it a significant presence in the vegetable snacking niche. This is a promising area of growth, and while management do not expect any immediate payoff from the deal, it is clear that they see it as a potentially long-term partnership.
“We’ve done a lot of due diligence,” said CEO Ramon Laguarta, “and we’re expecting a lot from that [deal]. “Pepsi says it is expected to have co-branded products on the market by the end of 2021, with the niche likely to grow larger next year.
It’s all about balance
Ultimately, Pepsi is trying to strike a balance between investing in core franchises like Doritos and Zero Sugar Pepsi while pushing into attractive growth areas like energy drinks and plant-based protein snacks. This is the approach that management considers to be the best long-term generator of positive returns for investors.
After making big acquisitions like SodaStream and Rockstar energy drinks in recent years, 2021 will not include purchases from game-changing brands, Pepsi said. Instead, investors should see another year of solid sales growth as profit margins hold up and cash returns fall. These steps should prepare the company for larger earnings gains in 2022 and beyond, all supported by Pepsi’s new market share momentum.
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