Pepsico Vs Coke? PepsiCo Still Wins
The Coca-Cola Company (NYSE:KO) is not a bad stock to own but it's not as good as PepsiCo (NASDAQ:PEP), not by a long shot, at least not in our opinion. The Coca-Cola Company is a pure-play on beverages, trades at a higher valuation, and has a weaker outlook for dividend growth as opposed to PepsiCo's diversification, cheaper price target, and positive outlook for dividend growth. When it comes to dividend-growth investing there really is no choice, not if you want to maximize your returns.
PepsiCo Beats Consensus And Reaffirms Guidance
PepsiCo brought in $14.82 billion for the Q1 period or up 6.8% from last year. The revenue is down sequentially but that is seasonally expected, the key takeaway for us is that revenue grew nearly 7.0% on top of last year's 7.0% growth and that pace should continue for the next couple of years. On top of that, the revenue beat consensus by 200 basis points on stronger than expected organic sales and strength within its recent acquisitions. On an organic basis, PepsiCo was able to grow its revenue by 2.4% versus the 1.7% expected giving evidence to the fact stay-at-home eating trends are more sticky than some have realized. Acquisitional growth totaled 5.0% of the gains outpacing that target by more than 100 basis points.
On a segment basis, most operating regions saw positive gains. There notable strength in Africa/Middle-East and APAC and the gains in all regions were bolstered by favorable pricing and mix as well. In North America, the Frito-Lay segment grew 4% and Quaker 2.0%. Africa/Middle-East grew a whopping 40% driven by economic reopening, diversification, and expansion efforts while APAC led at 70%. Latin America shrank by -5.0% while the EU a smaller -2.0% due to widespread shut-downs that should dissipate later in the year. FX had an impact on revenue as well but not a positive one. FX shaved 0.5% off of the topline results but this should change as soon as the current quarter if the company's guidance is any indication.
Moving down to the bottom line, PepsiCo was able to control costs and leverage its revenue growth to accelerated earnings growth. The GAAP $1.24 is up 29% from last year and beat the consensus by $0.13 while the adjusted $1.21 is up 14% YOY and beat by a dime. As for the guidance, PepsiCo is expecting mid-single-digit revenue growth with a +1% favorable tailwind from FX and core, organic EPS growth in the high-single-digits.
PepsiCo Offers Value And Yield
We like PepsiCo because of its value and yield relative to the entire Consumer Staples Select Sector (NYSE:XLP). not just Coke. Trading at 24X this year's earnings estimate and 22X next year's estimates it is cheaper than Coke (25X and 23X), Hormel Foods Corporation (NYSE:HRL) (27X and 25X), and McCormick (NYSE:MKC) (29X and 28X) while delivering a better yield. McCormick yields a mere 1.5% compared to PepsiCo's 2.9% while Hormel pays only 2.1%. The Coca-Cola Company has a slightly better yield and is a Dividend King but there is a catch. Coke's payout ratio is higher, its growth outlook a little dimmer, and the expectation for robust distribution increase much less. PepsiCo is paying out about 66% of its earnings compared to Coke's 80% and has a relatively sound balance sheet. The debt is a little high but is fueling growth, leverage is moderate and coverage ample. Based on the cash flow and capital outlook we are confident in saying PepsiCo should increase its payout by 7% to 10% in 2021 making the 49th consecutive increase. And it should come with the next declaration.
The Technical Outlook: PepsiCo Is Ready To Rocket Higher
Shares of PepsiCo have been moving higher since early March when the analysts started getting bullish. More than one sell-sider called this stock out as a multi-year play and we think they are more than right. Based on the price action, the stock is poised to rally another $10 at least putting price action above $152 and at an all-time high. Once the fresh all-time high is set, we expect to see value-oriented dividend investors began flocking to this market and drive it up another handle or two.
