PepsiCo Inc.

Here are two funds offered by Trimark. We rate both as conservative. Both cut risk by investing in high-quality, large-capitalization stocks. Note that the two funds emphasize different areas of the economy: Trimark Canadian has 26.8% of its holdings in financial services; its next largest holding is in consumer discretionary (consumer companies sensitive to economic cycles such as autos, leisure, hotels, consumer retailing) at 16.5%. Trimark U.S. Companies’ largest allocation is in financial services at 19.5%, followed by health care at 17.6%. TRIMARK CANADIAN FUND $25.19 (CWA Rating: Conservative) (AIM Funds Management, 5140 Yonge Street, Suite 900, Toronto, Ontario M2N 6X7. 1-800-631-7008; Website: www.aimfunds.ca. Buy or sell through brokers.) uses a bottom-up stock-picking style, focusing on fundamentals like earnings, cash flow and low debt....

MCDONALD’S CORP. $45.78, New York symbol MCD, has sold only Coca-Cola soft drinks at its restaurants since 1955. But demand for carbonated sodas has weakened in the past few years, as consumers switch to healthier drinks. So McDonald’s has begun selling non-carbonated drinks from PepsiCo at some of its outlets. PEPSICO INC. $63.68, New York symbol PEP, drinks now sold at these McDonald’s outlets include Gatorade sport drinks, Tropicana fruit juices and Lipton iced teas. The deal does not cover Pepsi or Diet Pepsi colas, or fountain drinks. If this pilot project succeeds, McDonald’s will probably expand it to other stores. We see both McDonald’s and PepsiCo as buys....

IVY CANADIAN FUND $30.79 (CWA Rating: Conservative) invests in high-quality, large capitalization stocks. The $4.4 billion fund’s top holdings include Shoppers Drug Mart, United Parcel Service, Manulife Financial, Danaher Corporation, Reckitt Benckister plc, Bank of Nova Scotia, Bank of Montreal, Thomson Corporation, Diageo plc and PepsiCo. Ivy Canadian’s breakdown by industry is: Consumer staples, 26.5%; Financials, 17.8%; Industrials, 14.8%; Consumer discretionary, 9.6%; Energy, 3.1%; Utilities, 3.1%; Information technology, 1.4%; and Health care, 1.1%....

IVY FOREIGN EQUITY FUND $30.39 (CWA Rating: Conservative) outperformed the Morgan Stanley benchmark international index over the last 10 years. The fund gained 8.6%, and that was better than the Morgan Stanley benchmark’s gain of 6.7%. Ivy Foreign Equity Fund made 21.3% over the last year. The fund invests in companies based outside of Canada, but cuts risk by avoiding direct investment in emerging markets. Ivy Foreign Equity is one of our top foreign fund recommendations. Still, we think non-U.S. international funds should make up at most 10% of the holdings of a conservative investor. The fund’s top 10 holdings are Reckitt Benckister plc (UK household & healthcare products), Danaher Corp. (U.S. control products and tools), Essilor International SA (corrective eyewear), Henry Schein Inc., (U.S. healthcare), PepsiCo (U.S. food & beverage), William Demant (hearing health products), United Parcel Service (U.S. express carrier, Diageo plc (UK alcoholic drinks) and Ecolab Inc. (U.S. maintenance & cleaning products). The fund holds 42.1% of its assets in the U.S., 14.7% in the UK, 12.9% in France, 5.6% in Denmark, 5.0% in Canada and 3.0% in Switzerland....

IVY GROWTH AND INCOME FUND $23.87 (CWA Rating: Conservative) (Mackenzie Financial Corp., 150 Bloor St. West, Toronto, Ont. M5S 3B5. 1-800-387-0780; Web site: www.mackenziefinancial.com. Load fund — available from brokers) is a balanced fund, holding a mixture of stocks, bonds and cash. The fund has returned 7.5% annually for the 10 years. It made 10.2% over the last year. The fund’s MER is 2.14%. The fund’s top stock holdings are Shoppers Drug Mart, PepsiCo, Omnicom Group (U.S. media services), Bank of Nova Scotia, Danaher Corp. (U.S. control products and tools), Reckitt Benckiser plc (UK household & healthcare products), Thomson Corp., Manulife Financial and United Parcel Service. This $3.5 billion fund holds 21% of its assets in bonds. Interest rates on bonds are now under 5% annually in Canada. That’s the total return that a bond can provide, from today until it matures. However, bonds leave investors at the mercy of inflation, which shrinks the purchasing power of all fixed-return investments. In fact, an upsurge in inflation could wipe out all returns on bonds, and some of their principal besides....

At one time, mutual funds within a particular ‘fund family’ often shared some key investment characteristic, such as a conservative or aggressive investment approach, or a stress on value as opposed to growth. However, due to trends in the mutual-funds industry such as corporate mergers and takeovers, and more aggressive marketing, a fund’s membership in a fund family now has little bearing on its investment approach or appeal as an investment. Below, for instance, we analyse five funds from the Ivy Group. (Note that Ivy is now part of Mackenzie Financial, which in turn is part of IGM Financial. The contact information listed for Ivy Growth and Income also applies to the other four.)...

PEPSICO INC. $65 (New York symbol PEP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.6 billion; Market cap: $104.0 billion; WSSF Rating: Above average) is the world’s second-largest maker of soft drinks after Coca-Cola. Leading brands include Pepsi, Mountain Dew and Slice. Through its Frito-Lay division, PepsiCo is also the world’s leading maker of salty snack foods, such as corn chips (Doritos, Fritos) and potato chips (Lay’s, Ruffles, Stax).

New products cut risk

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In the past decade, we’ve regularly advised buying PepsiCo and selling The Coca-Cola Co., which is the opposite of the consensus. Mind you, we have a high regard for Coca-Cola as a business. But there’s a risk in placing too much emphasis on a single product and/or a single brand name, as the company does with Coke. Then too, you need to pay attention to demographics and other key trends. We felt conventional soft drinks were sure to become harder to sell to baby boomers as they grew older and became more health conscious. In contrast, we liked PepsiCo’s mix of soft drinks and snack foods. We liked it even better when it bought the Tropicana fruit juice business. We were even more impressed when it acquired (through the Quaker Oats takeover) the Gatorade brand, a sugar-based soft drink with health food rather than junk food connotations. Its Naked Juice and vitamin-laced bottled water could also work out nicely. To top things off, Coke was earning far too many buy recommendations from the implied approval of its most prominent investor, Warren Buffett. Even Mr. Buffett doesn’t get it right every time....

STATE STREET CORP. $68.35, New York symbol STT, has agreed to acquire rival Financial Services Corp. in an all-stock transaction worth $4.5 billion, or roughly 20% of State Street’s market cap of $22.7 billion. Financial Services provides custodial and related services to institutional investors. State Street investors will own roughly 85% of the combined company. The company anticipates between $625 million and $675 million in pre-tax restructuring charges. But merging the two firms’ back offices and technology platforms should save State Street between $345 million and $365 million in the first two years, and bring additional savings in future years. State Street’s stock moved down on the news, due to concerns over the company’s ability to reach its cost savings targets. It may also have trouble hanging on to some Financial Services’ clients. The stock will probably stay in a narrow range until it realizes some of the benefits of the merger....

WEYERHAEUSER CORP. $60 has raised its quarterly dividend for the second time since April 2005, from $0.50 a share to $0.60. It now yields 4.0%. Earnings have improved and the company is still the world’s biggest holder of softwood timberlands. Buy. VERIZON COMMUNICATIONS INC. $33 plans to discontinue its Airfone service, which lets airline passengers make phone calls from special units built into the back of seats. Verizon prefers to invest in its ground-based wireless networks, rather than upgrade its aging Airfones to compete with new services that offer air travellers high-speed Internet access. Buy. PEPSICO INC. $59 plans to build a new facility in Oklahoma that will specialize in sport drinks, particularly its top-selling Gatorade brand, and flavored waters. Demand for these products is growing strongly, and this plant will help expand PepsiCo’s sales in several southeastern states which are major markets for it. We now see PepsiCo as a buy for long-term gains.