Financial Research Project

Bethea, A., Halford, D., Perry, A.

FINC 330 4550 Business Finance (2202)

University of Maryland Global Campus

April 30, 2020

Background and Industry

PepsiCo, Inc. has been a long-standing snack, beverage, and multinational food organization that have been around since 1965. The organization itself has established themselves as one of the major front runners within their designated markets within the United States and out. The firm has maintained its dominance within these markets by operating in more than 200 countries worldwide, with more than 22 individual brands under its umbrella. It is one of the few companies in the United States celebrated for doing business their way. Currently, the company ranks at number 48 in the fortune 500, which is a drop from last year’s rank of forty-five (Fortune, 2019). The company generates more than one billion dollars annually from each of its 22 individual brands according to its sales. PepsiCo, Inc. has maintained six divisions across the world, which include; Asia, Middle East, and North America, Quaker Foods North America, North America Beverages, Latin America, Europe, and Sub Sahara Africa, and Frito-Lay North America (PepsiCo, Inc., 2019). Each of these divisions has unique histories and work in distinctive ways, which has led to the success of the PepsiCo, Inc. brand. This report will help guide the path for the PepsiCo, Inc. brand and help project its future financial performance.

The purpose of this report is to look at Pepsi Co Inc.’s financial ratios and current bonds and stocks information to provide recommendations on future company investments. By the end of this report, the investor will have a clear overview of Pepsi’s financial position, and the rewards verse risks associated with investing in the company.

Financial Leverage Ratios

Below are the financial leverage ratios for Pepsi Co Inc. from 2015 to 2016.

(Stocks Analysis on Net, 2020)

Based on the the Debt to Assets and Debt to Equity ratio, Pepsi has reduced the amount of funding from creditors over the last five years (although only slightly). However, if you just compare 2015 to 2019, it does’t provide a clear picture as to the instablility the company has had with managing their debt.

In 2017, Pepsi had a rough year in regards to revenue. This prompted the company to start conducting market research and investing in a “healthy choice” option for consumers. (Wahba, 2017) This meant, the company needed to increase debt to obtain the financial means to accomplish this task, and help the company recover from their losses. This is a direct corrolation to the Interest Coverage Ratio and Debt to Equity ration in 2017-2018. The Debt to Equity ratio has been declining since 2017, which means the company has managed their loans, and the 9.20 Interest Coverage ratio indicates they can pay off interest nine times over. (Hayes, 2020)

Since the Debt to Asset ratio is currently 0.41, the company is actually financing their company through equity. However, the 2.17 Debt to Equity ratio is a little high, especially compared to its competitor Coca Cola Inc., whose is 1.57. (Maecrotrends, 2020) This shows that Pepsi Co bonds are risker to invest in because they owe more creditors then Coca Cola. However, when looking a the Interest Coverage ratio, the Pepsi’s ability to pay its creditor’s with no problem, so currently Pepsi is a low risk investment.

Pepsi Co Inc. Bond Perfomance

As shown below, here are two different bonds issued by Pepsi Co. For the purpose of this analysis, it is to be assumed that the par value for both bonds are $1,000.00. Under each of the bond quotations, the last price of each bond, the annual coupon interest payments, and the yield of each bond will be calculated.

(FINRA, 2020)

1. Last Price:

The listed price of this bond is $93.00 per each $100.00 of par value. Being that the par value of this bond is $1,000.00, the current price is:

= ($1,000.00/$100.00)*$93.00

= $10.00*$93.00

=$930

2. Annual Coupon Interest Payments:

The listed coupon rate is 5.750%. The par value of the bond is $1,000.00, so the annual coupon interest payments are:

=$1,000.00*5.750%

=$57.50

3. Current Yield

The formula for current yield is Annual Coupon Payment/Current Bond Price equaling:

= $57.50/$930

=6.18%

(FINRA, 2020)

1. Last Price:

The listed price of this bond is $130.98 per each $100.00 of par value. Being that the par value of this bond is $1,000.00, the current price is:

= ($1,000.00/$100.00)*$130.98

= $10.00*$130.98

=$1,309.80

4. Annual Coupon Interest Payments:

The listed coupon rate is 7%. The par value of the bond is $1,000.00, so the annual coupon interest payments are:

=$1,000.00*7%

=$70.00

5. Current Yield

The formula for current yield is Annual Coupon Payment/Current Bond Price equaling:

= $70.00/$1,309.80

=5.34%

The Central Amer. Bottling Corp is a 10 year bond with a maturity date of January 31, 2027 and is paid semiannually. The Yield-to-Maturity (YTM) is 7.064%. (FINRA, 2020) The Pepsi Bottling Corp Inc. is a 20 year bond with a maturity date of March 1, 2029 and is paid semiannually. The Yield-to-Maturity (YTM) is 3%. Both bonds are callable, however, only the Central Bottling Corp bond has a next callable, which is January 31, 2022.

The Yield-to-Maturity is an internal rate of return for bonds that are bought today at market price. This rate works under the assumption that the bond will be held until maturity and all principle and coupon payments will pay on time. (Boundless, 2014) The current yield and the YTM are similar, whereas the current yield divides annual cash inflow by the market price to determine the profit an investor would make, but only for one year. (Chin, 2020) When analyzing a bonds value, an investor should be looking at the YTM and the coupons rates. If the coupon rate is higher than the YTM, the bond is selling above par value or at a premium. Inversely, if the YTM is higher than the coupon rate, the bond is selling below par value or at a discount.

When deciding which bond to purchase, the Central Amer. bond has a coupon rate of 5.750% and an YTM of 7.064%. That means this bond is selling at a discount and can be purchased below the actual price of the bond. The Pepsi Bottling bond has a coupon rate of 7% and an YTM of 3%, meaning you will be paying above the value of the bond at this time. At first glance, it would seem that buying a bond at a discount would make more sense. However, it is actually risker in the long run because if the interest rates rises the price will drop, thus closing the price gap between a premium bond. This makes the premium bond less risky. (Thomas, 2020) Additionally, the time remaining on the bonds play a factor in making this decision, because the closer the bond is to maturity the less likely a premium or discount. However, looking at the YTM rates of each bond, and weighing the risk, it would be more favorable to choose the Central Amer bond because it poses a higher return rate and is closer to maturity.

Both the Pepsi bonds above are callable bonds. This means that the company can “call” the bonds at any time in order to pay off debts early. Pepsi could call these bonds if the yield rate decreases, which would allow them to borrow at a more beneficial rate. The reason both of the bond quotes above have such a favorable coupon rate, is because the company needed to make them look more attractive, as callable bonds pose more risk for the investor by not having a locked in interest rate. (Chin, 2020)

For instance, if the rate of the bond falls to 2 percent, the issuer may decide to call the bond and pay off the old bonds issued at 4 percent and reissue them at 2 percent. The investor will receive the original principal of the bond, but they will likely have the difficulty reinvesting the principal and matching the original 4 percent return. The investor can either buy a lower-rated bond to obtain a 4 percent return or buy another higher-rated bond or accept a 2 percent return. (Conley, 2019) With the short term remaining on the the Central Amer bond, and the high YTM rate, the fact the bond is callable would not play a factor in the decision to invest. The Pepsi Bottling bond has a significate variance between the coupon rate and YTM, that bond would pose a greater risk, being callable.

When deciding whether to invest in Pepsi Co Inc., it is good to not only look at the potential returns earned, but also the stability of the company. A good way to determine how a company is doing is to look at their financial trends and ratios. From 2015- 2019, Pepsi’s Operating Income has consistently increased and its interest expense has decreased. This shows that the company, meaning the company has the ability to meet all of its financial obligations. (MarketWatch, 2020) This is also reflected in the company’s Gross and Net Profit Margin, bot show Pepsi is retaining enough revenue to cover operating expenses and use as income. Additionally, the Debt-to-Assets and Debt-to-Equity reflects the company is being financed by equity. Pepsi has reduced the amount of financing through lenders, and is more than able to pay back their creditors, as reflected in the 9.20% Interest Coverage ratio for 2019. This makes Pepsi a low risk investment.

Works Cited Boundless. (2014). Finance-Chapter 6 "Bond Valuation". Retrieved 04 29, 2020, from Boundless: https://content.umgc.edu/file/2ee1f909-f178-4451-b113-e8e9ce7c3a4a/1/Chapter6BondValuation.pdf Chin, J. (2020, 02 24). Yield to Maturity (YTM). Retrieved 04 27, 2020, from Investopedia: https://www.investopedia.com/terms/y/yieldtomaturity.asp Conley, P. (2019, 01 14). Understanding Callable Bonds. Retrieved 04 28, 2020, from The Balance: https://www.thebalance.com/understanding-callable-bonds-417110 FINRA. (2020, 04 21). Bond Detail: Central Amer Bottling Corp. Retrieved 04 21, 2020, from FINRA: http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C669623&symbol=PEP4449012 FINRA. (2020, 04 21). Bond Detail: Pepsi Bottling Group Inc. Retrieved 04 21, 2020, from FINRA: http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C99927&symbol=PEP3666756 Hayes, A. (2020, 04 12). Interest Coverage Ratio Definition. Retrieved 04 26, 2020, from Investopedia: https://www.investopedia.com/terms/i/interestcoverageratio.asp Maecrotrends. (2020). Coca-Cola Debt to Equity Ratio 2006-2020 KO. Retrieved 04 26, 2020, from Macrotrends: https://www.macrotrends.net/stocks/charts/KO/coca-cola/debt-equity-ratio MarketWatch. (2020). Annual Financials for PepsiCo Inc. Retrieved 03 23, 2020, from MarketWatch: https://www.marketwatch.com/investing/stock/pep/financials/balance-sheet Stocks Analysis on Net. (2020). PepsiCo Inc. Solverncy Ratios. Retrieved 04 21, 2020, from Stocks Analysis on Net: https://www.stock-analysis-on.net/NASDAQ/Company/PepsiCo-Inc/Ratios/Long-term-Debt-and-Solvency Thomas, K. (2020, 02 07). New Investor's Guid to Premium and Discount Bonds. Retrieved 04 28, 2020, from The Balance: https://www.thebalance.com/premium-vs-discount-bonds-417066 Wahba, P. (2017, 10 04). Pepsi Sales Are Taking a Hit As the Company Pushes Non-Soda Options. Retrieved 03 27, 2020, from Fortune: https://fortune.com/2017/10/04/pepsico-soda-sales-earnings/