Pepsi soothes investors with sales growth and plans for payouts

Signage is seen on the side of a delivery truck outside the Pepsi Beverages plant in Louisville, Kentucky, US, on Feb 11, 2018. (Bloomberg pic)

NEW YORK: PepsiCo rose to the highest in two months as investors brushed off a lower profit forecast, instead focusing on sales growth in snacks and North American beverages and the company’s plans to return about US$8 billion to shareholders this year.

The owner of Doritos and Gatorade was able to push through price increases, boosting revenue at key units in the fourth quarter. PepsiCo also announced deeper cost cuts as it strives to become “leaner, more agile and less bureaucratic,” according to Chief Executive Officer Ramon Laguarta.

As it slashes costs, the company will also boost spending on marketing in a bid to sustain sales growth in North America. PepsiCo is adding drivers and trucks to distribute snacks while reducing headcount in other areas.

PepsiCo shares rose as much as 3% to US$115.95, the most since Dec 21. The stock had gained 1.9% this year through Thursday’s close, lagging the S&P 500 over that period.

The market’s favourable reaction shows that investors are taking a different view of PepsiCo’s 2019 challenges — which include currency volatility, slowing economic growth and weakening consumer sentiment. Coca-Cola listed many of the same uncertainties in its earnings report on Thursday.

For this year, PepsiCo forecast a 1% decline in core earnings per share, excluding currency shifts, along with a slowdown in sales growth. The company also plans to boost its dividend by 3% and carry out share buybacks.

The lower profit outlook illustrates how the cost of boosting sales is becoming more expensive, Bonnie Herzog, an analyst with Wells Fargo, said in a research note after the release of fourth-quarter results.

The company is extending its cost-saving program through 2023, incurring US$2.5 billion in charges. PepsiCo said it plans to shutter plants and that 70% of the costs would come from severance and other “employee-related costs.”

In an interview, Chief Financial Officer Hugh Johnston didn’t specify how many jobs might be cut, adding that the company planned to “boost selling capacity” in North America via more drivers and trucks. Some employee reductions could also result from taking automation programs overseas, he said.