PepsiCo Investment Analysis
PepsiCo Investment Analysis
Detailed Overview of PepsiCo Stock
In 2017, PepsiCo Company traded shares worth US $ 155.9 billion with each share trading at US $109. The company has allocated 60% of its resources to equity securities with the remaining 40% going to fixed income securities and cash. The expected long-term rate of return is 7.8% and forms part of the estimated long-term return of 9.3%. The common stock of the company is traded in the New York Stock Exchange as the principal market with shares also listed in Amsterdam, Chicago, and Swiss stock exchanges (Jallow, 2021). The New York Stock Exchange is used by PepsiCo as a market for registrants’ common equity, related stockholder matters, and issuer purchases of equity securities. In the year 2005, the company had 197,500 shareholders who all had common stock with the company with a US $7 billion repurchase program taking place. The issuer repurchase program for that year gives the table below.
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
As part of the diversification strategy, the company offered repurchases of convertible preferred stock from the employee stock ownership plan (ESOP) fund as established by Quaker and information is as tabulated below.
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
In a bid to promote a greater diversification plan, the company put in place a stock-based compensation plan for the employees. The employees were enlisted in the pool of stock ownership and incentives that were aligned to stock to make their interests match those of shareholders. Therefore, the company’s employees are entitled to receive stock options grants bring compensation as an incentive for primary long-term. These grants to members of staff are usually offered at the prevailing stock price that making the exercise price offered to each employee to be equal to the prevailing stock price (Errandonea Ochoa de Zabalegui, 2017). In the arrangement, the employees are given a vesting period of three years. Further, each employee gets 7 years after the vesting period to decide to purchase by paying the exercise price for each share of the company in proportion to the exercised percentage. This arrangement of making the employees get grants of company stock through the given exercise price has proved beneficial to the company since it has made the company’s stock price remain high in the market above the exercise price. Also, as part of the diversification strategy, the company has given employees more commitment in working for the company to increase the bottom line due to the accruing returns as owners of the company.
In the year 2006, the company’s stock-based compensation expenses witnessed the following movement with the assumption of 100 basis point change.
| 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
Therefore, the PepsiCo stock-based compensation expense including RSUs was US $ 296 in 2006, US $ 311 in 2005, and the US $ 368 in 2004. From the table with expected stock life of one year in 2006 the stock-based compensation increased by US $ 12 million. Likewise, if it were less with one year, the expected compensation expense declined by US $ 7 million. This is attributed to the valuation model adopted by all the Black-Scholes that is determined by risk-free rate, expected volatility, and expected yield (Jallow, 2021). In 2005, PepsiCo sold 7.5 million shares of the PBG stock, resulting in reduced percentage ownership reducing equity income from PBG. Therefore, the net income from operations fell by 2% with net income per common share derived from operations declining by 1%. However, in 2004, the net income from operations increased by 17% with net income per common share increasing by 18%.
Analysis of the PepsiCo investment Using Ratio Analysis
Historical valuation ratios for PepsiCo as analyzed from 2018 to 2020 are shown below.
| Ratio | 2020 | 2019 | 2018 |
| Price to Earning (P/E) | 26.15 | 27.83 | 13.01 |
| Price to Operating Profits (P/OP) | 18.47 | 19.78 | 16.10 |
| Price to Sales (P/S) | 2.65 | 3.03 | 2.52 |
| Price to Book Value (P/BV) | 13.84 | 13.76 | 11.21 |
| Earnings per Share (EPS) | 5.16 | 5.26 | 8.91 |
Source: https://www.stock-analysis-on.net/NASDAQ/Company/PepsiCo-Inc/Valuation/Ratios#Historical-Valuation-Ratios-Summary
The price-earnings ratio P/E gives an investor a glimpse of how much to pay for common stock per dollar of earnings. From the summary, PepsiCo Inc. P/E ratio increased from 2018 to 2019 but declined slightly from 2019 to 2020. The price to operating profit ratio for the company increased in the year 2018/2019 but decreased in 2019/2020. This ratio is used since it is not sensitive to nonrecurring earnings and capital structure like the price-earnings ratio. PepsiCo uses price to sales ratio (P/S) since sales as the key item in the income statement is hardly affected by changes or manipulation in other fundamentals such as EPS or book value. This is influenced in part by the stability of sales than earnings that makes them be always positive. The price to sales ratio for 2020 was 2.65 that was lower than 2019 that had a 3.03 figure with 2018 recording the lowest figure of 2.52 (Kwon, & Yang, 2008). The price to book value (P/BV) ratio is used by investors as indicative of the market judgment due to the relationship between the company’s required rate of return and its actual rate of return. During the period, the P/BV ratio for 2020 was 13.84 while for 2019 was 13.76 that was slightly lower. However, in 2018 the P/BV ratio was the lowest in the period under observation since it was 11.21. The earning per Share which is computed as net income available for PepsiCo common shareholders dividend by several common stock outstanding shows a declining trend from 2018 to 2020. In 2020, the EPS was 5.16, 2019 it was 5.26 and in 2018 was 8.91 being the highest for the company. The table below shows the net income and number of common stocks in PepsiCo for the year 2018, 2019, and 2020.
| 2020 | 2019 | 2018 | |
| Number of Common Stock outstanding in millions | 1379 | 1389 | 1404 |
| Net Income in millions | 7120 | 7314 | 12513 |
Source: https://www.stock-analysis-on.net/NASDAQ/Company/PepsiCo-Inc/Valuation/Ratios#Historical-Valuation-Ratios-Summary
Analysis of the PepsiCo investment to stock Beta
Beta is a ratio that measures the risk or volatility of a company’s share price in comparison to the market as a whole. If the company’s beta is 1.0, it shows the company rises and falls in direct relationship to the movement of the benchmark index (Kwon, & Yang, 2008). While a beta that is less than 1 will show a stock that is less volatile than the overall market and a beta greater than 1 indicates that the stock is more volatile. The beta for PepsiCo is 0.63 for 5 years. The table below shows the industrial beta for PepsiCo against its competitors.
| Company Name | Beta (5 years) |
| PepsiCo Inc | 0.63 |
| Consumers Stables | 0.68 |
| Coco-Cola Consolidated | 0.66 |
| Mondelez International Inc. | 0.70 |
Suitable Investor for PepsiCo Inc. Portfolio
The company EP stocks Composite and RS ratings that stand below 90 minimum of leading growth stocks make it suitable for risk-averse investors. This is because the company’s earning track record, steady dividends payout, and diversification in the beverage and snacks market makes it appealing to investors (Gondo, 2021). Thus, the company despite not being known for strong earnings growth or stock price performance, it has assured investors steady income stream. This has made it record growth in dividends for more than 25 years consecutively. For example, in June, it announced an increase in quarterly dividends with 5% to US $1.075 per share or US $ 4.30 for the full year. This will be double $ P 500’s average of 1.31 yield since it stands at 2.7%. This puts the company’s year earnings stability factor to 3 out of the range of 1 (most stable) to 99 (least stable). When all these scenarios are factored, PepsiCo would be ideal for risk-averse investor.
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.
Gondo, N. (2021). Is Pepsi Stock A Buy Right Now, After A Blowout Earnings Report?
Jallow, D. (2021). A Strategic Case Study on PepsiCo. Available at SSRN 3828353.
Kwon, O., & Yang, J. S. (2008). Information flow between composite stock index and individual stocks. Physica A: Statistical Mechanics and its Applications, 387(12), 2851-2856.
