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When you buy and hold a stock for the long term, you definitely want it to provide a positive return. Furthermore, you’d generally like to see the share price rise faster than the market. Unfortunately for shareholders, while the PepsiCo, Inc. (NASDAQ:PEP) share price is up 25% in the last five years, that’s less than the market return. Zooming in, the stock is up a respectable 7.6% in the last year.
Let’s take a look at the underlying fundamentals over the longer term, and see if they’ve been consistent with shareholders returns.
See our latest analysis for PepsiCo
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During five years of share price growth, PepsiCo actually saw its EPS drop 5.1% per year.
Since the EPS are down strongly, it seems highly unlikely market participants are looking at EPS to value the company. Given that EPS is down, but the share price is up, it seems clear the market is focussed on other aspects of the business, at the moment.
In contrast revenue growth of 7.8% per year is probably viewed as evidence that PepsiCo is growing, a real positive. It’s quite possible that management are prioritizing revenue growth over EPS growth at the moment.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
PepsiCo is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for PepsiCo the TSR over the last 5 years was 45%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
PepsiCo provided a TSR of 11% over the last twelve months. But that was short of the market average. The silver lining is that the gain was actually better than the average annual return of 8% per year over five year. This suggests the company might be improving over time. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example – PepsiCo has 2 warning signs we think you should be aware of.