Synergy Asset Management Focus Dividend Portfolio – Member in Focus PepsiCo Reports Q3, 2021 & Lifts its Outlook as Sales Rise


PepsiCo Member in Focus – Focus Dividend Portfolio

PepsiCo, Inc. is one of the leading global food and beverage companies. Its complementary brands and businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices, and Quaker foods. Until last week (October 14th), Shares of PepsiCo had lagged the industry year-to-date, see the price-performance chart below.

In our opinion, the latest price weakness offered an attractive entry point as PepsiCo, just like Coca-Cola, stood to further benefit from the Delta Variant recovery as more people are expected to resume travel and visit service stations and restaurants. Since reporting strong Q3 2021 results last week, PepsiCo is now outperforming the broader soft drink industry by almost 3%. PepsiCo has a 2.72% indicated yield.

PepsiCo Sees Snack and Soft Drink Demand Growing

PepsiCo said it raised its guidance for the full year amid strong sales growth of its Mountain Dew, Doritos, and other snacks. Executives said new flavor varieties like Dorito’s 3D Crunch, Cheetos Crunch Pop Mix, and Mountain Dew Flaming Hot helped drive sales growth during the most recent quarter. The company plans to introduce a variety of alcoholic beverages based on its legendary soft drink brands starting early 2022 in a partnership with Boston Beer Co.

PepsiCo Will Continue to Pass on Higher Costs to Consumers with Price Increases into 2022

PepsiCo and the Beverage & Soft Drink Industry at large continue to face supply chain disruptions and increases in costs for aluminum cans, plastic bottles, labor, and transportation. In recent months, food companies, in general, have said they are paying “significantly more for ingredients and materials, including cooking oil and steel, as costs rise for freight, fuel, and labor.”

What Makes PepsiCo a Standout Focus Dividend Portfolio Member?

The answer is simple, management’s foresight and fortitude to manage profit margins at every level (see the chart below). Top panel, Year-Over-Year % Change in Revenues Trailing 12 Months. Note that revenue growth has increased year over year from ~3% – ~4% pre-Covid to upwards of 12% in the latest quarter. The second panel Gross Margin chart trending down shows that the year over year acceleration in revenue growth has not been enough to offset the increase in Cost of Goods Sold. The third panel shows the EBIT Margin (operating profit margin) and management’s foresight to begin cutting Selling, General & Administrative, and R&D expenses ahead of Covid related cost pressures to hold operating profit margins steady at ~15% throughout the entire pandemic! The fourth panel shows a steady net margin at roughly 11.5% through the bulk of the pandemic despite input prices for Cost of Goods Sold skyrocketing!

This is responsible management and a favorable investment scenario.

Why Margin Management Matters? (Historical Perspective)

Margin management is an executive team’s toolkit for maximizing the earnings per share available to common shareholders after all revenues are taken in and expenses are taken out. In the case of PepsiCo, management realizes that they must now raise prices into 2022 because there are only so many SG&A and R&D expenses they can cut before the cuts themselves begin negatively impacting the overall business. The result of successful margin management for years on end is a well-managed, stable historic EPS trajectory as can be seen with the orange-colored line in the Price and Earnings chart below:

Why Margin Management Matters? (Forecast, Forward-Looking Perspective)

A well-managed, stable historic EPS trajectory down not happen with the foresight to anticipate changes in costs and the fortitude to change cost allocations accordingly. It is this foresight and courage that the PepsiCo management team employs daily that continues to drive FY1/FY2 EPS Estimate Revision Trends positive year over year. In the chart below you will note that even amid supply chain disruptions and increased input costs, PepsiCo has been able to drive forecast EPS Estimates for 2021 and 2022 higher over the course of the last 12 months!

PepsiCo Makes the Cut at Synergy Asset Management

When compared to other higher-yielding, food maker alternatives that would stand to benefit from a pandemic recovery, it is easy to see why PepsiCo makes the cut for Synergy Asset Management! Let’s consider alternative food makers Conagra Brands and Lamb Weston Holdings.

Conagra Brands – A high 3.77% indicated dividend yield but revenue growth was on the decline throughout Covid, margins rolling over on all fronts. This is NOT a favorable investment scenario unless management can turn margins around through increased revenue growth or additional cost-cutting.

The result is a decline in FY1/FY2 EPS Estimate Forecasts:

Lamb Weston – A moderate 1.68% indicated dividend yield but revenue growth is still down 6% throughout Covid with the current revenue trajectory unable to offset the increase in input costs, margins rolling over on all fronts with net margins 50% less than pre-Covid levels. This is NOT a favorable investment scenario unless management can turn margins around through increased revenue growth or additional cost-cutting.

The result is a collapse in FY1/FY2 EPS Estimate Forecasts:


Published October 21, 2021

Joe Maas, CIO | CFA, CFP®, ChFC, CLU®, MSFS, CVA, ABAR, CM&AA, CCIM
David Stryzewski, CEO |
CSA, NSSA


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