The grandfather of colas is The Coca-Cola Companywith the launch of the Coca-Cola brand in 1886. The Pepsi-Cola Company, today PepsiCo (NASDAQ:PEP)wasn’t far behind with its own Pepsi-Cola drink in 1898. And ever since, the two have battled it out for cola supremacy.
Neither Coke nor Pepsi has been able to defeat its cola competitor. So it didn’t take long for these two companies to up the ante by developing entire portfolios of soda brands. Nowadays, PepsiCo sells well-known sodas such as Mountain Dew, Pepsi Wild Cherry, Mug Root Beer, Crush and Starry in addition to its namesake Pepsi.
PepsiCo has built its portfolio by making several key acquisitions. Its acquisition of Mountain Dew in 1964 was particularly crucial to its current success. In the US soft drink market, Mountain Dew had a 6.6% market share in 2022, according to Statista. I would say this buyout worked pretty well.
Pepsi’s acquisition of Mountain Dew was huge. But the merger the following year proved even more significant for the company and its shareholders.
It has nothing to do with soft drinks. But today, nearly half of Pepsi’s profits come from a source that would have shocked the beverage company’s founders.
When a beverage company dreamed bigger
In 1965, Pepsi-Cola merged with Frito-Lay, a snack company whose portfolio today includes Lay’s, Fritos, Doritos, Cheetos, Funyuns, Spitz, Cracker Jack, and more. It was a significant departure for a company once focused entirely on soft drinks. But it was a good decision.
Through the first three quarters of 2023, PepsiCo’s Frito-Lay North America business segment generated $17.4 billion in revenue. That’s almost as big as the $19.7 billion in revenue from its North America Beverages segment.
In North America, Pepsi’s snack revenues almost match those of beverages. But these snacks actually have better profit margins. Frito-Lay’s Operating income of $4.9 billion is better than an operating profit of just $2.2 billion for beverages.
Not only is Frito-Lay’s operating profit higher than that of beverages, but it also accounts for 48% of PepsiCo’s revenue. total operating profit since the beginning of the year. In short, if Pepsi hadn’t turned to snacks almost 60 years ago, it would represent half of today’s company.
Why it matters to investors
There are so many takeaways from an observation like this for PepsiCo. For starters, with Pepsi being one of the largest beverage companies in the world then as now, growth would have been more limited if it had remained entirely within its core business. Expanding outside of that into an adjacent market with strong cross-promotional opportunities made perfect sense.
What is it similar to? Hershey what is doing now, extension beyond candy and into snacks such as pretzels and popcorn.
More generally, companies able to expand beyond their core competencies often make good investments; this trait is known as optionality. Many companies try to diversify and few succeed. But PepsiCo is one of the great success stories.
PepsiCo’s combination of beverage revenue and snack sales has an added benefit for shareholders: It’s a potentially more reliable company because it has greater diversity.
All things being equal, I would choose PepsiCo stock over a pure beverage company because of this stabilizing quality. If headwinds blow through the soft drink industry for any reason, PepsiCo has another line of business that can help it meet the challenges.
This is good news for dividend investors. PepsiCo has increased its dividend for 51 consecutive years, making it the dividend king. Many investors choose to invest in these companies because of their predictable dividend payments. Having a diversified business, it is more likely that PepsiCo will not be delisted by a sudden shock to its business.
And all of this is possible because the management team at The Pepsi-Cola Company – a beverage company – had the foresight to move into an entirely different field when it merged with the snack company Frito-Lay.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Hershey and recommends the following options: Long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
PepsiCo is known for its sodas such as Pepsi and Mountain Dew. But almost 50% of its profits come entirely from something else. was originally published by The Motley Fool