PepsiCo Just Reported Earnings. Here's What Investors Need to Know.
Key Points
Pepsi is struggling in North America, but the international business remains strong.
Management plans to increase in spending in North America by double digits next year.
The dividend remains attractive with a yield of 4.6%.
Mea culpa. Earlier this week, I predicted Pepsico (NASDAQ:PEP) would slide after earnings. I got that one wrong.
I thought Pepsi's recent slump, which had dragged shares to a five-year low amid stubborn inflation and weakness in snacks due to the impact of GLP-1 drugs, would continue, but shares of the food and beverage giant rose 3.7% on Thursday following the results.
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Pepsico topped expectations on the top and bottom lines in Q3, reporting organic revenue growth of 3.1%, an improvement from the first half of the year. Overall revenue rose 5.6% to $25.3 billion, which was ahead of estimates at $24.96 billion.
The snacks business showed improvement from the first half of the year, gaining volume market share, though this was offset by lower prices as the company adjusts to pushback from consumers and retail partners like Walmart. Still, volume and organic sales in the North American Foods segment were flat.
The international segment remained strong with organic growth of 6% or better in all four segments, though North American beverages reported flat organic sales and a 2% decline in volume.
Further down the income statement, core operating margin was down 35 basis points due to cost increases and higher advertising and marketing expenses. Core earnings per share rose 2% to $2.34, ahead of the consensus at $2.30.
Management also cut its core EPS growth forecast for the year to 2.5%-3.5%, from 5%-6% previously, indicating core EPS could decline in the fourth quarter.
Normally, a guidance cut like that would lead to a sell-off, but expectations had fallen low enough leading into the report that investors seemed satisfied with the beats on the top and bottom lines, and solid volume growth. Management also plans more cost cuts, which should support profit growth over the longer term.
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What's next for Pepsico
Despite the signs of momentum, management was clear that there's more work to be done, especially in the U.S. CEO Ramon Laguarta said bluntly, "We do not feel good about the beverage business," pointing to weakness in soft drinks in particular, and said the company was cutting costs across the business to invest in beverages. Those investments include improving execution and increasing advertising and marketing spending, which the company expects to grow in the double digits in the U.S. next year.
Laguarta said a key goal for next year is to maintain its top-line momentum.
Is Pepsi a buy?
If there's a silver lining to Pepsi's recent stock struggles, it's that the dividend yield has soared to 4.6%. Pepsico is a Dividend King, having raised its dividend for 54 years straight, and management said it expected to return $7.9 billion in cash through dividends to investors this year.
The gain in the stock, coming even as the company cut its earnings guidance, seems to signal that Pepsi may have bottomed out. It's cheap enough at this point, at a price-to-earnings of around 15, to justify low-single-digit earnings-per-share growth.
For the right kind of investor looking for a defensive dividend stock, getting some exposure to Pepsi makes sense, especially given its dividend yield near 5% and the potential for a recovery in North America.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.