Dr Pepper Snapple Group Inc (DPS, Financial) was recently upgraded to buy by Stifel analysts Mark Swartzberg and Christopher Sinnott. The analysts expect Dr Pepper Snapple's multiple to expand "as earnings momentum continues and given DPS's valuation history." I believe Dr Pepper is a good buy at current valuations given its history of earnings growth and share buybacks, good dividend yield, and reasonable valuations. Here's a look at the company's business in detail.
Dr Pepper Snapple Group Inc is a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States, Canada and Mexico with a diverse portfolio of flavored (non-cola) carbonated soft drinks and non-carbonated beverages, including ready-to-drink teas, juices, juice drinks, water and mixers. Approximately 84% of the company's volume comes from brands that are either #1 or #2 in their category. The company posted $6.1 billion of net sales in 2014 with the U.S. Contributing ~88% of the revenues.
The company's two largest competitors in the Liquid Refreshment Beverage (LRB, Financial) market are Coca-Cola (KO, Financial) and PepsiCo (PEP, Financial), which collectively represent approximately 60% of the U.S. LRB market by volume. The company also competes against other large companies, including Nestlé, S.A. (SIX:NESN, Financial), Kraft Foods (KRFT, Financial) and Campbell Soup Company (CMB, Financial). Despite this stiff competition, the company has posted an impressive earnings growth and its diluted EPS has increased by 64% in the last five years.
In addition to good financial performance, management is also doing a good job in terms of returning cash to the shareholders. The company has increased its dividend by 82% in the last five years. Last year it returned $717 million to the shareholders through dividend and buy backs.
On a currency-neutral basis, the company reported net sales increase of 3% in FY2014. Its core income from operations for 2014 increased 7% while its core EPS increased 14%. The company also posted solid performance on the free cash-flow front and free cash flow was 121% of reported net income.
The company is benefiting from the Rapid Continuous Improvement (RCI) initiative it launched in 2011. This initiative uses Lean and Six Sigma methods to deliver customer value and improve productivity. The company is using RCI as a means to achieve net income growth and increase the amount of cash returned to its shareholders. It has been able to create multi-product manufacturing facilities which provide a region with a wide variety of its products at reduced transportation and co-packaging costs. In 2014, under RCI initiative, the company worked collectively with its bottling partners to improve display tie-in rates on Dr Pepper, increase distribution on single-serve juice and streamlined its driver check-in and checkout processes. To date, RCI has helped the company generate $200 million in annualized cash productivity savings.
Going forward, we can expect the continued roll-out of RCI initiative to benefit Dr Pepper. The company is also expected to continue building its brands, execute with excellence in marketplace, engage its consumers through relevant programming, and provide them with innovative products and package formats to meet their evolving lifestyle.
In 2015, the company is expanding the test of naturally sweetened carbonated soft drinks to three key regional markets and launching Snapple Straight Up Tea, a new line of unsweetened and slightly sweetened teas, in 18.5-ounce PET bottles. The company is also expanding distribution of its glass bottle carbonated soft drinks, launching Hawaiian Punch in a pouch format and bringing Penafiel mineral water brand to the U.S. More importantly, the company plans to continue its focus on RCI and develop lean capabilities across the organization.
Dr Pepper's EPS is expected to grow 6.30% in the current year and 6.96% next year. The company has a healthy forward dividend yield of 2.40% and expects to return between $500 million and $550 million in 2015 through share buybacks. The stock is trading at 19.19 times forward PE. I believe it is a good dividend growth stock to have in your portfolio.
