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Faced with the twin problems of inflation and recession, investors are looking for companies that fare well, no matter the economic climate. A typical recession tends to drive investors to certain sectors of the market to move their money so they can hunker down and ride it out.

The consumer staples sector has been a safe harbor sector during prior economic storms… which makes sense, given that people will need to eat and drink, no matter what.

So far in this recession, packaged food and drink makers have felt the little impact of decades-high inflation on consumer demand—especially here in the United States—as consumers seem to be prioritizing spending on eating at home rather than at restaurants.

One stalwart company in that sector is PepsiCo (PEP).

While many people still think of Pepsi as just a beverage company, its business now extends beyond this industry, with Frito-Lay and Quaker products accounting for more than half the company’s sales and more than 65% of its profits.

On average, 11 of the 15 top-selling products in convenience stores come from PepsiCo. Lay’s is the world’s best-selling snack food brand, and has expanded sales from just $100 million fifty years ago to $30 billion today! Pepsi’s global dominance in salty snacks may be underappreciated, but when you dig down you’ll see its volume share is more than 10 times that of the next-largest competitor.
 

Pepsi’s Results

PepsiCo’s earnings report on July 12 confirmed that it is doing quite well—shrugging off both higher inflation and a stronger dollar—making it a safe place for investors to park their money.

Overall net revenue rose 5.2% to $20.23 billion in the second quarter ended June 11, beating analysts’ estimates of $19.51 billion, according to data from Refinitiv. On an adjusted basis, the company earned $1.86 per share, compared with estimates of $1.74 per share.

Organic revenue at the company’s Frito-Lay North America unit rose 14% in the quarter, with its Doritos, Cheetos, and Ruffles snack brands each delivering double-digit net revenue growth. Organic revenue at PepsiCo’s North America beverage business was also strong, rising 9%. Gatorade, Aquafina, and Lifewtr saw double-digit growth in the quarter.

Sale volumes for snacks and beverages increased 3% and 6% respectively during the quarter, matching the rate of the prior quarter.

Growth in PepsiCo’s markets in Latin America, the Middle East, Africa, and the Asia Pacific helped offset contractions in its main markets of Europe and North America. In Europe, for example, snack and beverage volumes were down 7% and 8% respectively, compared with a year earlier.

Meanwhile, Frito-Lay North America’s organic revenue rose 14%. But volume, which excludes the impact of pricing or currency fluctuation, declined 2%. The division did gain market share during the quarter. On the other hand, PepsiCo’s North American beverage unit saw organic revenue growth of 9%, but its volume fell by 1%.

Quaker Foods North America, usually the laggard of PepsiCo’s portfolio, was the only domestic segment to report volume growth. Its organic revenue climbed 18%, helped by double-digit growth in rice and pasta, oatmeal, and cookies. Volume rose 2%.

The company did report a nearly 40% fall in attributable net income, to $1.43 billion, in the second quarter as it recorded a $1.4 billion charge primarily related to the write-down of some assets in Russia.

However, PepsiCo executives did say: “The decline in core operating profit also reflects an increase in inflationary pressures across our commodity, labor, transportation, and supply chain costs.”

PepsiCo forecasts inflation will stay elevated for the rest of 2022 and said it remains open to raising prices further after seeing limited pushback from consumers so far.

It experienced a rate of inflation during its second quarter that was “well in the teens,” CFO Hugh Johnston told the Financial Times. “We certainly do expect that to persist,” Johnston said, noting that further actions to raise product prices or cut costs may be needed.

PepsiCo raised prices on its portfolio of products by 12% overall in the three months to mid-June. That increase was below the inflation rate it experienced, Johnston noted.
 

Pepsi’s Outlook

PepsiCo has boosted its outlook for the second quarter in a row. The company now expects fiscal 2022 organic revenue to rise 10%, up from the 8% forecast three months ago and the 6% penciled in at the start of this year.

The latest results were darn good despite ongoing economic and geopolitical volatility and rising levels of inflation. I expect this trend to continue.

The categories in which Pepsi competes make up about a third of total food and grocery sales in the U.S., based on Euromonitor retail data. And thanks to its category leadership across snacks and beverages, retailers view Pepsi as a strategic partner. That’s a huge plus.

Before the earnings announcement, PepsiCo stock was trading only about 4% below the record high struck in late April following the company’s first-quarter results.

Pepsi shares are included in the S&P Dividend Aristocrat Index—companies that have raised their dividend for at least 25 consecutive years.

Regarding its dividend, Morningstar said, “Pepsi has been robust on the capital return front, with over a decade of dividend increases and share buybacks of $2 billion-$3 billion over the past five years (excluding fiscal 2021). We expect dividend increases to continue to the tune of 7% on average over the course of our explicit forecast and envision the firm buying back roughly $2 billion worth of stock annually.”

I can’t argue with Morningstar. In fact, PepsiCo’s 2022 dividend increase put it in a position to earn the Dividend King designation, reserved for companies that have paid and increased their dividend for 50 consecutive years. This is a feat so rare that only 31 companies held the status in 2021.

For retirees who depend on dividend income, stocks with the Dividend King status offer an extra degree of reliability and security.

Pepsi’s current yield is a very respectable 2.7%. Its stock is up 12% over the past 52 weeks, during a difficult time for the overall stock market. It is a buy anywhere in the $170 per share range.

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