Pepsi (NYSE:PEP) the beverage company Warren Buffett did not buy into a generation ago has some Black Swans floating over. It’s all very simple. Today Pepsi spends 58% of earning on dividends. Ten years ago they spent 31% and retained 69% within the business. The dividend has grown faster than earnings and that clearly is unsustainable.
Pepsi has acquired $29.4 billion in debt. That buddy is a snout full and I am not waiting for ratings agencies to maybe say there is a problem. Currently they pay $1 Billion per annum in vig to the institutional Shylock. Some $16 Billion is due in the next five years. Sure some of it will get rolled over. But bond holders are beginning to realize rates are going up. Borrowers who are addicted to cheap debt will have severe withdrawal pain. Shareholders will feel pressured.
The debt load is about 25% of current market cap. They cannot safely borrow more money.
Pepsi needs to refinance much of the debt for very long terms to lock in historic low rates. Pepsi needs to de-leverage its balance sheet. The increase in indebtedness is alarming.
CEO Indra Nooyi is making noises about becoming a healthy snack and drinks company. Easier said than done
Black Swans have been sighted.
George Gutowski writes from a caveat emptor perspective.