Wednesday, October 05, 2016

Investing ideas not forthcoming... looking back at Pepsico

Financial markets remain uncertain.  Here, there is much more pruning going on than investing.

When investing, it is often adding to existing equity positions when there is a hiccup for a stock that still looks like an opportunity.  These additions are generally small, just adding for a fee of $7.95 a trade. There are many positions here that have been built simply by having a long term hold approach plus making small incremental additions at what is hoped are opportune times.

Pepsico is one of those stocks.  It was first bought in the early 1990's, date not available even at the broker. At the time, it was purchased because I thought that I had some insight into the firm, as I had been its international business banker in the early 1980's.  That knowledge was clearly dated and I had no ties to the firm when the stock was purchased, but I had experienced its culture - aggressive, competitive, and sharp edged.  They treated their bankers poorly but politely, not bad for themselves of course.  They realized that senior management at banks wanted new business at almost any cost, and they rightly took advantage of that.  When making a large loan to them to build a bottling plant in Argentina with German equipment, my job was simply to source the opportunity, do the paperwork, run it up the hierarchy, and keep the client pleased.  The further it went up, the more pleased my managers were.  Putting this in place led to constant contact with Pepsi, many lunches and dinners as was the style in those days.

That Argentine exposure was not a positive for the bank's stock by the late 1980's.

While that may not have been the right reason to buy the stock at the time I did, it has been a profitable investment. Today that position has a 2.7% yield.  The stock price is multiples of the purchase price and it yielded the stock YUM, meaning the spin-off of KFC, Pizza Hut, and Taco Bell, which has led to additional capital gains and has a 2% dividend.

Would I buy it today at a forward P/E of around 20 and with a long term debt to equity ratio of 250%. No.  It's already owned here in size.  Someone looking at it as a new investment could view today's price as the cost of entry to a great stock.  Margins in the soda business are substantial, not unlike the tobacco business.  With Gatorade, Tropicana, Quaker Oats, and other product lines that add up, this is a vast global consumer products company with what is generally viewed as good management.  I have no reason to doubt that, but have no idea now.  In fact, I have never liked the beverage, Pepsi, or its even sweeter and more caffeinated cousin, Mountain Dew.  Nevertheless, many people do.

The best guess here is that it could be a reasonable "toe in the water investment" for stock buyers, but with its size any investor in broad index funds is getting a piece of it in the mix.

Not adding here, but thought about it.


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