Are Pepsico's Earnings Good News For Its Dividend Future?

If you are looking for a salty snack or a cool drink, you might have a PepsiCo product in your hand. The global beverages and snacks conglomerate has also provided plenty of refreshments for dividend investors. It is a dividend aristocrat with 53 years of consecutive dividend increases. It has a forward dividend yield of 3.31% and an annual dividend of $5.42. In the most recent quarter, it returned $8.2 billion to shareholders, $7.2 billion of that  in dividends. 

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While it's unlikely that the dividend is in jeopardy, it's worth reviewing recent earnings to see what we can learn about where Pepsico's growth may come from next. The company delivered 13% earnings per share growth as it reduced its cost of sales, but organic growth was up by less than 2%, down sharply year over year. 

Snacking Less

One immediate concern is a weakness in North American convenience food purchases. The Frito-Lay North America division was down by 0.5%. The Quaker Oats division was down by 18%, much of that driven by the effect of a large recall of bars and other products. The company expects to meet rather than exceed a 4% revenue growth target for the full year. 

With stratospheric inflation hopefully in the rearview mirror, it's unlikely that PepsiCo will need to, or be able to, increase prices significantly anytime soon. Like many other consumer goods companies, it has raised prices in recent quarters but now sees that snackers have scaled back their consumption of Frito-Lay products. The market was aware of this issue before the earnings release, and four analysts lowered their price targets for the stock’s future in July alone. 

Some of this drop could merely be price sensitivity, but we can't rule out the potential for changes in behavior. On the earnings call, PepsiCo CEO Ramon Laguarta said that the company has not seen a significant impact from the rapid adoption of GLP-1 weight-loss drugs but that it is something the company is monitoring.

Given that most of the adoption of these drugs is heavily concentrated in the U.S. and the decrease in the volume of Frito-Lay product sales appears to be occurring around the world, it is likely that something else is causing the decline in snacking. However, the company is paying more attention to permissible foods, such as brands like PopCorners and SunChips, which are perceived as healthier options.

Laguarta stated that while plain potato and tortilla chips may need some price adjustments, new flavors are performing well. This indicates that pricing strategies and flavor development are key to snacking success. 

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Beyond The Fizz

Like Coca-Cola KO, while Pepsi is the brand most associated with the company, its future growth is unlikely to come from it. The company is seeing large strides in functional water. Laguarta pointed out that both Gatorade and Propel are taking market share.

But don't rule out carbonated beverages yet. The expansion of the Mountain Dew brand into new flavors has resonated with consumers, and the company also plans to expand its zero-sugar offerings. Its partnership with Celsius CELH and its company brands in the space also expose it to the resilient energy drinks market. 

A Global Focus

Speaking to analysts, Laguarta noted that Pepsi's future remains an international story. The company has seen China's consumers be cautious about spending but still sees potential in that area. Net revenue growth in the Asia Pacific region was up 1% in the quarter. In Latin America, net revenue growth was up by 2%, driven by increased beverage volume. Europe remained strong, and the company's overall international organic net revenue growth was 7%. Laguarta is also looking to other emerging markets to find new customers. 

While Pepsico's quarter was not exactly what many investors hoped to see, the company clearly has a strategy to address the weakness in the snack foods division while powering forward with new beverage offerings. 

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