A look back at Pepsico

Let's go back a year, and see how my reasoning played out

About a year ago I wrote a 3 part analysis on Pepsico PEP 0.00%↑ and after considering my options I decided to sell my shares in the company after doing my valuations and seeing that it looked wildly overvalued.

One year on, and the company is trading at around the same price that I sold it at, so I thought to look into the business, see if anything has changed, and whether or not my concerns have been addressed.

The thesis

Let’s take a look back at what I wrote a year ago to see what I thought about the company, and what the thesis for it would be:

1. The company has a simple and understandable business model

2. The companies margins and growth aren’t particularly good

3. The company is a dividend aristocrat and will continue to raise its dividend for the foreseeable future

4. The dividend increases will slow down to allow earnings to catch up

5. The company is wildly overvalued

How has this held up?

Let’s take it point by point:

• The company has a simple and understandable business model

Well, they haven’t changed business models yet!

Overall the soft drinks and snacks business is as simple of a business to understand as any, It’s so simple that I think if you were to explain it to a 3 year old, they’d probably be able to understand it.

• The companies margins and growth aren’t particularly good

The companies margins didn’t improve at all, but 2021 was actually a highlight with quite substantial revenue increase during the year.

That said I suspect that a lot of that revenue and earnings increase is not a real return, since 2021 (and now 2022!) are seeing quite substantial inflationary pressures.

I’m not convinced that anything has structurally changed here.

• The company is a dividend aristocrat and will continue to raise its dividend for the foreseeable future

Nothing has changed here. The company has carried on paying a dividend, and last raised its dividend a couple of quarters ago.

Everything points to the management team being committed to the dividend.

• The dividend increases will slow down to allow earnings to catch up

Surprisingly enough this didn’t happen!

I was expecting that with a 70%-ish payout ratio the company would want to slow down the dividend increases to let earnings grow faster and the payout ratio reduce over time.

Instead the company has seemed to have chosen to raise the dividend in line with earnings, around 7% for each over the past year.

This isn’t really good to be honest, and I’m concerned with the companies ability to maintain this high of a payout ratio.

• The company is wildly overvalued

Well, the company is still trading at the exact same price as it was when I sold it.

While the companies earnings have gone up, they haven’t really gone exceptionally high, that is, they haven’t grown nearly enough to meaningfully change the intrinsic value of the business.

At least not enough to catch up to the outrageously high market price.

The future

Overall my thesis remains the same, and the company continues as overvalued as it was when i sold it.

The core value proposition of the business remains the same:

• The company is reliably profitable

• It will return capital to shareholders

• It is severely overvalued

All of these have continued to be the case, and so at least for now I will not purchase any shares.

If the valuation meaningfully changes in the next couple of years, I may reconsider and reopen my position in the company.

My Stance: SELL

What about you? Do you own PEP 0.00%↑ ? Do you think they are fairly priced?