Pepsi's fourth-quarter revenue grew organically by 4.5% to $27.9bn. Sales growth was driven by near double-digit price hikes as volumes of food and drink both fell. This meant full-year revenue grew by 9.5%, which was below the group's previous 10.0% guidance.
Underlying operating profit rose 10% to $1.7bn, ignoring exchange rate impacts. This was helped by price hikes and cost-cutting measures.
Full-year free cash flow improved from $5.9bn to $8.1bn, due to more cash being generated by the business. Net debt rose by $0.4bn to $34.1bn.
Pepsi announced a 7% increase in its annual dividend to $5.42 per share.
In 2024, organic revenue is expected to grow by at least 4%. The group also plans to return $8.2bn to shareholders through dividends and share buybacks.
The shares fell 2.2% in pre-market trading.
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Our view
It was a weak finish to 2023 for Pepsi, as revenue growth slowed to mid-single-digits in the final quarter. Softening demand for the group's famous fizzy drinks meant that full-year revenue landed below the group's expectations.
Missing your own guidance isn't a good thing, especially when you've raised it twice throughout the year. But it goes to show that the cumulative impact of price hikes is becoming increasingly difficult for consumers to stomach, impacting both drink and food volumes.
Cost-cutting initiatives have continued at pace, helping to offset some of the impacts of lower volumes and keep profits growing at double-digit rates. That's impressive but remember, cost cuts are more like a plaster than a longer-term treatment.
Looking ahead, we anticipate easing cost inflation, which should slow the rate of price hikes and revive some demand for Pepsi's products. Growth from a more sustainable mix of price and volume would be welcome.
Longer term, we're not too worried. Pepsi boasts a wide range of top-quality brands. And unlike rival Coca-Cola, it doesn't limit itself to soft drinks. Pepsi's products include snack brands such as Walkers crisps and Doritos, and Quaker Oats.
Pepsi's business model varies considerably by region. It'll manufacture products in some markets, and in others, it hands over almost complete control to a licensing partner - such as Britvic in the UK. On the one hand that makes Pepsi more capital intensive thanks to investments in factories and production equipment, increasing risk, but it's also allowed manufacturing processes to benefit from scale.
While net debt is relatively high at around $34.1bn, it's manageable for now. We're monitoring it closely, especially in the current high interest rate environment.
Overall, we consider Pepsi's variety of brands and history of strong execution a real bonus. But both food and beverage volumes have begun moving in the wrong direction. Because of this, we're likely to see the rate of price hikes slow this year, and revenue and profit growth along with it.
Pepsi's valuation sits slightly below its long-term average. But trading at 21.2 times forward earnings puts heavy expectations on its shoulders - meaning the shares could still be sensitive to stock market fluctuations or earnings disappointments. Right now, there are other names in the sector that look more attractive to us.
Pepsi key facts
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