UVA-C-2425
May 28, 2019
This public-sourced case was prepared by Luann J. Lynch, Almand R. Coleman Professor of Business Administration, and Mark E. Haskins, Professor
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Shareholders’ Equity at PepsiCo
Having just finished her afternoon run, Joan Dunkirk opened a bottle of Aquafina and took a sip to quench
her thirst as she sat down to scan the financial news online. She noticed that PepsiCo had released a summary
of 2018 results. She skimmed the summary and noted PepsiCo’s expectations about dividends and share
epurchases for 2019:
The Company today announced a 3 percent increase in its annualized dividend per share to $3.82 from $3.71 per share,
effective with the dividend expected to be paid in June 2019. This represents the Company’s 47th consecutive annual
dividend per share increase….For 2019, the Company expects…total cash returns to shareholders of approximately $8
illion, comprised of dividends of approximately $5 billion and share repurchases of approximately $3 billion.1
Dunkirk wasn’t quite sure why companies would buy back their own stock. She bought stock when it was
a good deal, making money on it by either collecting the dividends the company paid and/or holding onto the
stock while the stock price increased and then selling it later. But she wasn’t sure whether, or how, her logic
translated to management’s thinking when they decided to buy back a company’s stock.
Setting her bottle of water on the table, she stared at it. Something caught her eye; something she had never
noticed before. “Copyright PepsiCo 2018.” There it was, right below the main label. Dunkirk remembered her
surprise when she first discovered that the company didn’t just make Pepsi and Diet Pepsi. It made so many of
the snacks and drinks she had grown up enjoying—Lays potato chips, Fritos corn chips, Quaker oatmeal,
Gatorade sports drinks, Tropicana orange juice, Sa
e hummus, and many, many more. And now, she realized
that the company also made Aquafina. Surely the company’s stock was a good investment with all those popular
and names in its portfolio. Perhaps the company was buying back its own stock to fuel future stock
appreciation. She didn’t know for sure.
According to PepsiCo’s summary announcement, share repurchases and payment of dividends were two
ways companies could provide cash returns to shareholders. But what about stock dividends as opposed to
cash dividends? And what about stock splits? Both stock dividends and stock splits increased the number of
shares of stock a shareholder owned, so it seemed they would provide something of value to shareholders as
well. But there was no mention of either of those in PepsiCo’s summary of 2018 results.
She continued skimming the summary of 2018 results:
Reported net revenue increased 2 percent….Reported EPS was $8.78…2
1 “PepsiCo Reports Fourth-Quarter and Full-Year 2018 Results; Provides 2019 Financial Outlook,” PepsiCo,
https:
www.pepsico.com/docs/album/investors/q4-2018/q4-2018-earnings-release_jxwwalwh2hhtz213.pdf (accessed Apr. 29, 2019).
2 https:
www.pepsico.com/docs/album/investors/q4-2018/q4-2018-earnings-release_jxwwalwh2hhtz213.pdf.
This document is authorized for use by Samantha Goldstein, from 9/3/2020 to 11/4/2020, in the course:
MORS XXXXXXXXXX: Leadership in Organizations - Waytz (Fall XXXXXXXXXXHBR Simulation), Northwestern University.
Any unauthorized use or reproduction of this document is strictly prohibited*.
Page 2 UVA-C-2425
She thought it was interesting that companies reported earnings per share (EPS) when they reported their
financial results. There was no doubt that EPS was a number that got a lot of attention in the business press.
But wouldn’t EPS be affected by these decisions companies made related to their stock? She was now even
more curious.
Dunkirk wanted to know more about how a company’s stock-related actions—like buying back shares of
stock, paying dividends, issuing new shares of stock or different types of stock (if that was possible), or even
executing a stock split—affected the company’s financial statements and its reported EPS. She decided to
investigate.
Company Background3
PepsiCo was a global food and beverage company that owned beverage
ands such as Pepsi-Cola,
Gatorade, and Tropicana, and food
ands such as Frito-Lay and Quaker. Revenues for 2018 totaled
$64.7 billion. The company organized its operations into the following six divisions:
Frito-Lay North America (FLNA)
Quaker Foods North America (QFNA)
North America Beverages (NAB)
Latin America
Europe Sub-Saharan Africa (ESSA)
Asia, Middle East, and North Africa (AMENA)
The first three divisions included the company’s businesses in the Unites States and Canada—FLNA
included the
anded food and snack businesses; QFNA included the company’s cereal, rice, pasta, and other
anded food businesses; and NAB included the company’s beverage businesses. These three segments
accounted for 62% of 2018’s total revenues. The last three divisions included the company’s beverage, food,
and snack businesses in the respective geographical regions. (Exhibit 1, panel A shows 2018 revenues by
segment). In 2018, 57% (43%) of revenues came from inside (outside) the United States (Exhibit 1, panel B).
Shareholders’ Equity at PepsiCo
Dunkirk began her targeted shareholders’ equity investigation by obtaining copies of PepsiCo’s financial
statements from its XXXXXXXXXXK report. She obtained the Consolidated Balance Sheets (Exhibit 2), the
Consolidated Statement of Income (Exhibit 3), and the Consolidated Statement of Cash Flows (Exhibit 4).
She was relatively familiar with those three financial statements. She noticed a fourth financial statement, the
Consolidated Statement of Equity (Exhibit 5), that she was less familiar with. Given her interest in wanting to
understand how transactions related to PepsiCo’s stock affected the financial statements, however, she had a
hunch that this financial statement would be important.
Dunkirk knew that looking through a company’s financial statements often led to additional questions that
couldn’t be answered from the financial statements alone. In those situations, she understood that the footnotes
to the financial statements could be useful, as well as some basic internet research of relevant business articles
3 Information in this section was taken from PepsiCo 2018 SEC 10-K report.
This document is authorized for use by Samantha Goldstein, from 9/3/2020 to 11/4/2020, in the course:
MORS XXXXXXXXXX: Leadership in Organizations - Waytz (Fall XXXXXXXXXXHBR Simulation), Northwestern University.
Any unauthorized use or reproduction of this document is strictly prohibited*.
Page 3 UVA-C-2425
and company press releases. First, she skimmed through the 10-K’s pertinent financial statement footnotes to
see if there were any she thought might be relevant to her understanding of stock-related transactions. Notes
10 and 11, in particular, came to her attention. Note 10 provided the details of the company’s earnings per
share calculation (Exhibit 6). “Note 11 — Prefe
ed Stock” (Exhibit 7, panel A) sounded like it might be
elevant as well, so she added it to her collection of information to review. Not understanding much about
prefe
ed stock, but wanting to learn more about it, she searched prior years’ footnotes—the footnotes to the
company’s XXXXXXXXXXK offered more detail about the prefe
ed stock, so she kept a copy of that information,
too (Exhibit 7, panel B).
She decided to skim the remainder of PepsiCo’s XXXXXXXXXXK to see if there was any other potentially
pertinent information that caught her eye. She ran across “Item 5, Market for Registrant’s Common Equity,
Related Stockholder Matters, and Issuer Purchases of Equity Securities” (Exhibit 8), which certainly pertained
to stock-related issues. She set aside a copy of that. Also of interest was the supplemental earnings per share
information she came across in “Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations” (Exhibit 9, panel A). She recalled seeing a news article touting PepsiCo’s 2018 year-
end earnings per share results (Exhibit 9, panel B) that did not highlight the same EPS figure as that presented
in PepsiCo’s income statement—she now had an inkling as to why that supplemental Item 7 EPS information
was presented.
In perusing some of the articles that had surfaced from her internet search, she came across one that was
quite intriguing. It was just a short one, but the title had caught her attention—“What PepsiCo’s Move from
NYSE to Nasdaq Means for Investors” (Exhibit 10). Companies moved from one stock exchange to another?
Why? Did it really matter?
And finally, in her search for some historical data on PepsiCo’s common stock, she gathered some
additional information about PepsiCo’s dividend payment and share repurchases from all the company’s 10-K
eports since 2000 (Exhibit 11). The company’s payment of cash dividends had steadily increased during that
time period. The company also had bought back stock, every year except one, since 2000, but the size of those
epurchases had varied quite a bit. She hadn’t noticed anything about stock dividends or stock splits as she
skimmed through those 10-K reports, but she wondered if the company had done either at any point in the
past. With a bit more internet research, she found no evidence that the company had ever issued a stock
dividend. She did find, however, that PepsiCo had split its stock five times in the past, although the last time it
had done so was in 1996. She made a written note of these splits (Exhibit 12) and a mental note to come back
to them at some point to consider what the financial statement effects might have been.
After draining the last drop from her bottle of Aquafina, Dunkirk decided to switch to coffee