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America’s Most Shareholder Friendly
Beverage Stock
by Stephen Mauzy, Advisor of High Yield Wealth
No investment strategy is applicable to more investors. Of that I'm convinced. The evidence –
from Credit Suisse, Goldman Sachs, Ned Davis Research, Morningstar, and others – is
overwhelming: Dividend growth has an uncanny ability to consistently generate wealth better
than any other investment strategy over time.
One of my top High Yield Wealth picks for 2014, Dr Pepper Snapple Group (NYSE: DPS),
proves my point. The maker of the eponymous Dr Pepper soda and a myriad of other popular
soft drinks was spun off from Cadbury Schweppes PLC in 2008. Soon after, it began paying and
raising its dividend. As Dr Pepper's dividend went, so went the share price.
Dr Pepper's Share Price/Dividend Correlation
Dr Pepper's shares were trading near $28 when it began paying its dividend. Today, it trades
near $49. The dividend has increased 250% and the share price has increased 68%. That's
wealth generation incarnate.
Of course, investing is about the future, not the past. That said, I still like Dr Pepper for the
future. What's more, I like it more than its two primary competitors, Coca-Cola (NYSE: KO)
and PepsiCo (NYSE: PEP). For one, Dr Pepper offers more income per dollar invested: Dr
Pepper yields 3.1%; Coca-Cola and PepsiCo yield 2.8% and 2.7%, respectively.
To be sure, Coke and Pepsi are more pervasive brands, and their respective parent companies
generate far more revenue: Coca-Cola's revenues are nearly eight times Dr Pepper's trailing 12month revenues of $6 billion. PepsiCo's are nearly 11 times greater.
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But Dr Pepper's portfolio of products accounts for nearly 21% of the U.S. carbonated-soft-drink
market. More than 75% of the company's volume is from brands that are either No. 1 or No. 2 in
their flavor categories. Where Dr Pepper competes with Coca-Cola and PepsiCo, namely in the
United States, it holds its own.
Dr Pepper Brand
Category/Brand Position
Mott's Apple Juice
Apple Juice #1
Dr Pepper
Non-Cola Other #1
Sunkist Soda
Orange Soda #1
Squirt
Grapefruit Soda #1
Hawaiian Punch
Fruit Punch #1
7-Up
Lemon-Lime Soda #2
Penafil
Carbonated Water (Mexico) #1
Canada Dry
Ginger Ale #1
When analyzing an investment opportunity, it helps to be counterintuitive in your thought
process. Opportunity frequently lurks in perceived weakness.
For example, Dr Pepper's perceived weakness – lack of international market penetration – could
be its future strength. International markets, emerging markets in particular, keep the needle
inching forward for Coca-Cola and PepsiCo.
Dr Pepper, quite frankly, is behind the curve internationally. But don't blame managerial
ignorance or sloth. International expansion has been thwarted by long-standing licensing
agreements that were signed during the Cadbury years. These agreements have companies
outside the United States distributing and selling Dr Pepper's most popular brands.
The good news is that management is aggressively taking back its franchise. The company
recently announced the repurchase of distribution rights for beverages in the South Asia and
Pacific regions.
When the opportunity arises, Dr Pepper has proven it can execute in international markets.
Though a small part of the business, with $346 million in sales for the first nine months of 2013,
the Mexico and Caribbean market is up 12% year over year.
It's no secret that Dr Pepper is a growth-challenged company (as are Coca-Cola and PepsiCo).
Revenue grinds ahead in 3%-5% annual increments. But being growth-challenged doesn't
equate to being investment-challenged.
Dr Pepper's business is high margin. Operating margins are consistently in the high-50% range,
while operating margins are consistently in the high teens. For the trailing 12 months, they're
59% and 19%, respectively.
High margins generate high cash flow. Free-cash flow is a measure of cash that a company has
left after it has paid its expenses, including capital expenditures and maintenance expenditures.
Free-cash flow is essentially the money a company could return to shareholders if the company
were to cease growing.
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Dr Pepper generates a lot of free-cash flow, and is expected to continue to do so in the future.
Year
Free Cash Flow
2011
$542 million
2012
$258 million
2013 (est.)*
$596 million
2014 (est.)
$733 million
2015 (est.)
$730 million
2016 (est.)
* Trefis estimates.
$719 million
Dr Pepper uses its free cash to practice what I call “efficient cannibalism.” By that, I mean it
allocates capital as efficiently as possible, and that means allocating capital to reduce share
count. Thus, it “cannibalizes” its shares outstanding, which makes each share outstanding more
valuable.
This makes sense for a company like Dr Pepper, which generates a 36% return on equity. If you
can't find new businesses that generate the same high return, invest in your own business.
Since 2009, Dr Pepper has repurchased more than $2 billion of its stock, and it expects to buy
back an additional $300 million of stock this year. As the share count is reduced, earnings and
dividend growth are concentrated on fewer shares.
Annual Dividend and Shares Outstanding Trends
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But even if Dr Pepper does nothing more than use free cash flow to continually repurchase stock
and raise dividends, it will do well for shareholders. For proof, look no further than High Yield
Wealth stalwart Altria (NYSE: MO), which is a very low-growth company in a very difficult
business. Altria continually buys back shares and hikes its dividend to great wealth-generating
effect.
In recent years, Dr Pepper has hiked its per-share dividend roughly 10.5% annually. An annual
increase of 10% is both reasonable and sustainable for the long term. To expect a 15% total
return for 2014 is also reasonable, especially given how cheap Dr Pepper is compared to the
competition. Dr Pepper trades at a 14.9 multiple to 2014 expected EPS; PepsiCo and Coca-Cola
trade at 17.6 and 18.1 times, respectively.
Now, a 15% total return might not sound impressive. But given that we are in the midst of a fiveyear bull market, I expect 15% total returns will be increasingly difficult to find in 2014.
Suggested Action: Buy Dr Pepper Snapple Group shares up to $54.
Top Investments for 2014
I know if you invest a modest sum into Dr Pepper Snapple Group today, you’ll put yourself on a
path to profitability for the next year (and beyond).
Simply put, my income experts believe Dr. Pepper is the single best dividend stock to buy today
and hold for the foreseeable future.
And if you enjoy this type of research, I’d like to give you the full Wyatt Research Best Stocks
for 2014 report.
You see, Dr. Pepper is just one of ten stocks in my full report. Each year, my entire team of
editors, analysts and advisors works on putting together all of our best ideas in one place.
And it’s not just income ideas. This report is filled with ideas from the energy, technology, retail,
financial and automotive sectors.
In the past, we’ve seen some of our best gains of the year from this single report.
And I’d like to send this report to you.
Just click here to find out how to claim your copy, now.
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