PepsiCo (PEP) - Get Report earnings showed that, even though the pandemic is denting performance, Pepsi mostly has the ingredients to remain a solid defensive stock pick for investors seeking protection against volatility.
The earnings showed a relatively stable business during the pandemic, so long as lockdowns can remain mostly out of the picture, and continued cash returns to shareholders. Plus, the dividend yield is very attractive.
The stock rose 2.5% to $1.37 a share after earnings Monday.
Here were the results against Wall Street expectations:
- Revenue: $15.95B v. $15.38B (actual results: -3% year-over-year)
- Adjusted earnings per share: $1.32 v. $1.25 (actual result: -11% YoY)
Pepsi said health and safety costs also weighed on profits, sending the earnings figure down more harshly than the revenue figure. While soda sales, which comprise almost half of company revenue, fell harshly — North America Pepsi fell 6.6% — food and snack items surged. Fruit-Lay rose 7%. Quaker Foods rose 23%. Strength in snacks and food were lifted by a surge in grocery store activity during the quarter. Weakness in beverages came as restaurants were closed for most of the quarter and there were no sporting events and stadiums open.
"Despite being faced with significant challenges and complexities as a result of the COVID-19 pandemic, our businesses performed relatively well during the quarter, with a notable level of resiliency in our global snacks and foods business,” management said.
Management added that it saw sales improvements to end the quarter, as lockdowns eased. Sales and earnings are expected to decline by a lesser percentage in Q3 and Q4, according to FactSet estimates. Analysts are looking for growth in 2021. The most important factor will be lockdowns and reopenings, so that beverage sales can indeed regain growth. Without this, those estimates may be questionable.
Management offered no guidance, as lack of certainty regarding lockdowns and virus cases restricts the company from making forecasts, an outcome investors expected.
But here are three reasons to buy the stock:
First off, with lockdowns easing, it’s clear that revenue and earnings will recover. Secondly, management did say that the company’s liquidity position is solid and that it has financial flexibility and isn’t concerned about returning cash to shareholders. Thirdly, the dividend yield is almost 3%, compared to a treasury market that provides almost noting over inflation and yields of less than 1%. For investors looking to experience less volatility and earn income, Pepsi remains a decent consideration.
Two issues: Pepsi currently trades at a modestly rich multiple of forward earnings and lockdowns aren’t sure to end.