Pepsi Bribes Itself

Pepsi (PEP) announces a dividend increase (good) and a substantial share buy back program (bad; very bad) The $15 Billion buy back officially signals that management believes the shares are under-valued and should be taken out of the game. The share buy back is approximately 15% of Pepsi’s market cap. Pepsi is involved in a global struggle for dominance in beverages. The struggle requires huge capital to avoid having someone eat your lunch.

By announcing the share buy back, the back handed comment is “our shares are under valued and the market place is not truly rewarding us for our efforts. “ Why is the market under valuing the shares and what are you doing directly with the enterprise value to maximize shareholder wealth.

Today the announcement is about the financial engineering. Tomorrow we will need to be concerned about effective capital allocation and how they sourced the $15 Billion. Did they steal from the cash position or are they leveraging with interest sensitive debt that will affect EPS for a long time.