PepsiCo, Inc
PepsiCo Investment Selection
PepsiCo, Inc. is a multinational company that specializes in beverage manufacture in America with a global network for manufacture and marketing their products. The company was formed in 1965 with the merger of Pepsi-Cola Company and Frito-Lay. Currently, the company deals with various diversified products. The company products were distributed in more than 200 countries generating net revenues of over $ 70 billion. Thus due to its net revenue, profit, and market capitalization the company is the second-largest food and beverage business in the globe behind nestle. The company is the dominant player in the Indian market with coke cola trailing it in the market. In the 2017 fiscal year, PepsiCo made the US $ 4.857 billion with annual revenue of US $ 62.525 billion which is an increase of 1.2 % from the previous year. During the year the company shares traded over $ 109 per share with the market capitalization reaching above the US $ 155.9 billion in September 2018 (Jallow, 2021). The company is ranked number 45 on the 2018 Fortune 500 list of the corporation in the United States in terms of revenue. The table below shows the revenue, assets, and employees employed by the company over the last 5 years.
| Year | Revenue in Million USD | Net Income in Million USD | Total Assets in million USD | Employees |
| 2016 | 62,799 | 6,329 | 74,490 | 264,000 |
| 2017 | 63,525 | 4,857 | 79,804 | 263,000 |
| 2018 | 64,661 | 12,515 | 77,648 | 267,000 |
| 2019 | 67,161 | 7,314 | 78,547 | 267,000 |
| 2020 | 70,372 | 7,120 | 92,918 | 291,000 |
The Diversification Plan
PepsiCo investment allocation is based on 60% equity securities with the balance being allocated between fixed income securities and cash. The expected long-term rate of return is 7.8% which is 9.3 % of the estimated long-term return. The New York Stock Exchange is the principal market for PepsiCo common stock which is also listed on the Amsterdam, Chicago, and Swiss stock exchanges (Jallow, 2021). In 2005 the company had 197,500 shareholders who own common stock. The company has targeted dividends 45% of the previous year’s net income from the continued operations. The New York Stock Exchange is the market for registrants common Equity, related stockholder matters, and issuer purchases of equity securities trading symbols. During the company’s US $ 7 billion repurchase program held in 2005, the following information was generated.
Issuer Purchases of Common Stock
| Period | Shares Repurchased | Average Price per Share in US $ | Total number of Shares Purchased | Total Value in US $ |
| 9/3 – 10/1/05 | 4.4 | 55.29 | 4.4 | 245 |
| 10/2 – 10/29/05 | 3.4 | 57.83 | 3.4 | 195 |
| 10/30 – 11/26/05 | 3.6 | 58.76 | 3.6 | 213 |
| 11/27 – 12/31/05 | 4.1 | 59.53 | 4.1 | 243 |
| Total | 15.5 | 57.77 | 15.5 | 1875 |
Source: https://pepsico.gcs-web.com/static-files/25a525c5-06a4-4fa4-a67c-8035fb967ed5
The company as part of its diversification strategy offered repurchases of its convertible preferred stock from the employee stock ownership plan (ESOP) fund that was established by Quaker about share redemptions by ESOP participants. This is well presented in the table below that summarizes the company convertible preferred share repurchases.
Issuer Purchases of Convertible Preferred Stock
| Period | Shares Repurchased | Average Price per Share in US $ |
| 9/4 – 10/1/05 | 4, 300 | 279.52 |
| 10/2 – 10/29/05 | 7,700 | 287.57 |
| 10/30 – 11/26/05 | 3,200 | 291.27 |
| 11/27 – 12/31/05 | 3,200 | 294.01 |
| Total | 18,400 | 284.41 |
Source: https://pepsico.gcs-web.com/static-files/25a525c5-06a4-4fa4-a67c-8035fb967ed5
To facilitate a seamless diversification plan the company instituted a stock-based compensation plan for its employees. Thus the employees were entered in the stock ownership and stock-based incentive awards to align the interest of employees to those of shareholders. The workers receive stock option grants as compensation for the primary long-term incentive. The grants to employees are offered at the current stock price making the exercise price for each employee equivalent to the current stock price (Errandonea Ochoa de Zabalegui, 2017). Each employee is expected to provide a vesting period which is usually 3 years. The employees are given 7 years after the vesting period to decide to pay the exercise price to make them purchase one share of the company stock for each option that has been exercised. This has made the company stock be always high in the market that is above the exercise price.
Investment Price for Common stock
The PepsiCo stock-based compensation expense including RSUs was US $ 296 in 2006, US $ 311 in 2005, and US $ 368 in 2004. Assuming a 100 basis point change the estimated 2006 stock-based compensation expense faced the following movements (increase/decrease).
| Component | 100 Basis point increase | 100 basis point decrease |
| Risk-free interest | $ 6 | $ (6) |
| Expected volatility | $ 2 | $ (2) |
| Expected Dividend yield | $ (9) | $ 10 |
Source: https://pepsico.gcs-web.com/static-files/25a525c5-06a4-4fa4-a67c-8035fb967ed5
If the expected stock life is one year the stock-based compensation increased by $ 12 million for 2006. If it were less with one year the expected compensation expense declined by $ 7 million. This is because the valuation of all the Black-Scholes assumptions depends on risk-free rate, expected volatility, and expected yield that is linked to expected life. In 2005 the net income from operations decreased 2% and the net income per common share from operations decreased 1%. The net income from operations in 2004 increased by 17% and the net income per common share increased 18%. In the year 2005, the company sold 7.5 million shares of PBG stock leading to lower percentage ownership that reduces the equity income from PBG.
Systemic and Potential Return
The company divisions are held responsible for stock-based compensation expenses hence the expense is allocated to the branches as incremental employee compensation cost. Therefore the allocation of the stock-based compensation expense has been approximated to 29% to FLNA, 22% to PBNA, 31% to PI, 4% to QFNA, and 14% to corporate unallocated expenses. The expense excludes the effect of changes in the company’s Black-Scholes assumptions and mirrors market conditions during the time of management control (Errandonea Ochoa de Zabalegui, 2017). Thus any differences between allocated expense and actual expense are recognized in the unallocated expense. The black Scholes model estimates are based on assumptions that the expected value of employees’ options is influenced by interest rates, employees’ exercises, stock price, and dividend yield.
| Detail | Estimated 2006 | Estimated 2005 | Estimated 2004 | Estimated 2003 |
| Expected life | 6 | 6 | 6 | 6 |
| Risk-free interest rate | 3.8 | 3.8 | 3.5 | 3.1 |
| Expected Volatility | 21% | 23% | 26% | 27% |
| Expected Dividend Yield | 1.9% | 1.8% | 1.8% | 1.1% |
Source: https://pepsico.gcs-web.com/static-files/25a525c5-06a4-4fa4-a67c-8035fb967ed5
The expected life determines the period for which risk-free interest rate, volatility, and dividend yield will be used. Thus it shows the time the employees are required to hold their options (Eades, & Thornhill, 2017). The risk-free interest derives from the expected US treasury rate during its expected life while volatility shows the stock price movement over the recent historical period covered by the expected life. The dividend yield is based on the company dividend policy and forecasts of net income, share repurchases, and stock price.
References
Eades, K. M., & Thornhill, D. (2017). PepsiCo, Inc.: Cost of Capital. Darden Business Publishing Cases.
Errandonea Ochoa de Zabalegui, J. (2017). Financial Analysis of the Financial Statements and Industry Comparison: THE COCA-COLA COMPANY and PEPSICO.
Jallow, D. (2021). A Strategic Case Study on PepsiCo. Available at SSRN 3828353.
