Not refreshing

Pepsi cash fountain won't quench sceptics' thirst

PepsiCo's cash fountain probably won't quench skeptics' thirst. Shares in the soft-drink giant fell more than 3 percent in early trading on Thursday despite a promise to boost payouts to shareholders by 35 per cent this year.

A bigger stock buyback and higher dividends could inject some fizz into the investment case, but a decision to rule out major changes in the struggling North American beverages business leaves the company playing catch-up with Coca-Cola. Activist investors like Nelson Peltz will probably be looking for more. Coke and Pepsi have both been trying to adapt to US consumers' shift from colas toward healthier refreshments. They have invested in non-carbonated drinks, cut costs and brought bottlers in-house to combat a sales slump.

The latest quarter shows, however, that Pepsi's struggles in its core beverages business continue to overshadow faster growth in its snacks division. Sales of fizzy drinks in North America fell by a percentage in the mid-single digits during the three months ended in December, according to the company.

That may embolden Nelson Peltz, who last year called for Pepsi to split its beverages and snacks divisions. Pepsi has argued that keeping snacks and beverages under one roof creates significant synergies and said on Thursday that an "exhaustive" review of what to do with the North American beverages business concluded that retaining it made the most sense.

The drop in value of Pepsi shares, though, suggests investors are skeptical. Even before the slide, the soda maker traded at a discount to both Coke and global snacks giant Mondelez on forward earnings, according to Reuters data. That suggests Peltz is on to something when he argues that a breakup could unlock value.

Pepsi isn't leaving investors totally empty-handed. Along with the increased buybacks and dividend, Chief Executive Indra Nooyi promised to keep cutting costs. Compared with Coca-Cola, though, Pepsi seems to lack imagination. Coke recently changed its management in the Americas, a possible prelude to splitting off its bottlers' distribution businesses. The company also cut a deal to market home-brew soda capsules with Green Mountain Coffee. If Nooyi wants to keep the skeptics at bay, Pepsi needs to shake things up.