Investors May Want to Give a Toast to PepsiCo

The world’s second largest soft drink maker, PepsiCo. (PEP), announced a share repurchase program that could amount to $15 billion over the next three years. The company had suspended buy backs earlier this year in order to devote capital to their acquisition of their two largest bottlers, which the company estimated at the time would produce cost savings of about $400 million annually (analysts are far more bullish on savings). Their new plan is to buy more than $4 billion worth of shares this year which will fall under a 2007 repurchase agreement that had $6.4 billion left on it at the beginning of the year. The board has further authorized a total of up to $15 billion in share repurchases through the year 2013. A repurchase of this size should be seen as a major vote of confidence from the board especially when considered in addition to the company’s recent 7% boost to its dividend.

Pepsi lead the way in acquiring the vast majority of their North American bottling operations last August; a move that was later mirrored by their primary competitor Coca-Cola (KO) as they recently acquired bottler Coca-Cola Enterprises (CCE). On the first of March Pepsi official closed on those deals, and now they are making a clear statement that they will aim to maximize returns to shareholder. The company expects to grow earnings in the current year by 11% to 13%, which equates to an expected EPS of $4.12 to $4.19. If the company can hit these targets, the new annual dividend per share of $1.92 is well within their reach with a payout ratio of under 50%.

To be sure, the fact that a company announces a massive buyback does not necessarily mean that they will follow through on that plan in its totality, but we still take it as a sign of confidence from management. As with any stock, there is an element of risk for shareholders, specifically for Pepsi the fact that carbonated beverages volumes have been on the decline for the last several years in North America. With that said, Pepsi is somewhat more guarded against that risk that is Coke or Dr. Pepper Snapple Group (DPS) because of their stable of non-carbonated offerings as well as their snack foods division being less affected.

Coming into this week we had an Undervalued rating on PEP shares and this announcement only solidifies that stance. The company is impressively growing earnings and according to some analysts the cost savings from recent acquisitions may be double what the company originally predicted back in August. Even with the company trading 2% higher on their shareholder friendly actions, they are still trading below their historically normal ranges of price-to-sales and price-to-cash flow. We think this stock offers good long term value and based on our methodology could easily trade for $71 to $80 per share in the coming months.

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