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PepsiCo Beat Wall Street's Estimates and Still Cut Its Profit Forecast in Half. What Dividend Investors Should Know

A beat and a cut on the same morning

PepsiCo, the company behind Pepsi, Lay's, Doritos and Gatorade, reported on Thursday, October 8.

Good on both lines. Then came the outlook for the full year.

Sales forecast up. Profit forecast roughly cut in half.

How do you sell more and earn less?

Margins. That's the share of each sales dollar that's left as profit.

Two things are squeezing PepsiCo's.

1. It cut prices. After years of raising prices, PepsiCo watched shoppers walk away from its snacks. Earlier this year it lowered prices in North America. It worked: snack volumes are growing again after several quarters of decline. But the price cuts took 2.8 percentage points off its North American profit margin.

2. Costs keep rising. PepsiCo's finance chief said commodity prices continue to climb. Oil above $100 raises the cost of making plastic bottles, running delivery trucks and frying chips.

Lower prices plus higher costs equals more sales and less profit on each one.

The one-time helper

PepsiCo's quarter included $178 million in tariff refunds, mostly in its drinks business.

That money is real, but it won't come again next quarter. When you read any earnings report this season, check whether the beat came from the business or from a one-off. We explained this in how tariff refunds are boosting earnings.

What's selling

• Smaller packs and multipacks
• Higher-protein and higher-fibre snacks
• Lower-sugar Gatorade
• International markets, which grew faster than North America

The CEO, Ramon Laguarta, said more cost-cutting is coming in the next few months and described a strong sense of urgency about fixing the North American business.

What it says about shoppers

Put PepsiCo next to Delta, which reported the next day:

• Delta: people are paying more for flights without complaint.
• PepsiCo: people stopped buying chips until the price came down.

Households are still spending. They're just choosy about where. They'll pay up for a trip and hunt for a deal on groceries.

What it means for dividend investors

PepsiCo is a classic dividend stock. It has raised its payout every year for more than 50 years. Many dividend ETFs hold it.

Nothing in this report threatens the dividend. But notice the link:

• Dividends are paid out of profit.
• If profit grows 3% a year, the dividend can't grow 7% a year for long.

So the likely effect is slower dividend increases, not a cut. If you own PepsiCo for income, that's fine. If you own it for growing income, lower your expectations a little. Our guide to dividend yield vs dividend growth explains the trade-off.

Why "safe" stocks aren't immune

Companies that sell food, drinks and household basics are called consumer staples. Investors treat them as shelters, because people keep buying toothpaste and soda in a recession.

That's true for sales. It's less true for profits when costs are rising. A staples company with rising costs has two choices: raise prices and lose shoppers, or hold prices and lose margin. PepsiCo tried the first, then switched to the second.

The stock rose about 1% to 2% in early trading, so investors weren't shocked. But an analyst at RBC said there are no overnight fixes here.

What to watch

• Coca-Cola, Procter & Gamble and other staples reporting over the next three weeks. Are they making the same trade-off?
• Commodity and oil prices. Relief there flows straight to margins.
• PepsiCo's cost-cutting plan, which could include job cuts.

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