Overview
DPS (Dr. Pepper Snapple Group) is a beverage company with a product line that includes Dr. Pepper and Snapple (duh), along with a variety of other soft drinks, juices, teas, and other consumer staples. Their collection of brands is strong as is their reach across the United States and, to a lesser extent, the rest of the world, where they have a presence but have not achieved anywhere near the penetration of Coca Cola and Pepsico. They are already well positioned for stable earnings and are not yet so large that there are no more worlds to conquer.
Performance and Valuation
DPS already has a nice track record of growth in every regard and churns out cash like the healthy, established company it is:
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Return on Equity: 39.24%
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YoY earnings growth (5 year, GAAP): 10.6%
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YoY cashflow growth (5 year): 5.7%
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YoY dividend growth (5 year): 11.9%
It grows plenty, but you aren't paying unreasonably for that growth either:
- Price/Earnings: 21.05, lower than the S&P 500
It should also be noted that the distributions are safe and have plenty of room to rise with a payout ratio under 40%. If we can conservatively project out a dividend growth rate of 9%/year and assume that yield stays around 2.5%, we are looking at a total return of 11.5%/year.
Risk Factors
The first thing that jumps out at people when talking about soda companies is how health conscious the West is becoming. DPS is well equipped to deal with this due to its diverse product line and ability to expand around the world. Growth will be easy to come by at least as long as it is for Coca Cola - DPS is exposed to the same risk of changing tastes without the drawback of scale inhibiting outperformance.
In the West there is also some political risk involved with potential extra taxes or other barriers to selling sugary drinks. DPS might be hit harder by this than its bigger competitors since it has less of a presence abroad.
Conclusion
DPS is in a fine place with ample opportunity to grow. Distributions are stable and rapidly growing. The stock is also undervalued relative to the broader market, trading at a lower P/E multiple with higher distributions and more potential to grow them. I'm buying unless something better gets my attention before I click the button, since I like money and DPS makes a lot of it.
Submitted March 20, 2017 at 02:03AM by thisistheperfectname http://ift.tt/2nqplaa
