In A Coke And Pepsi World, Don't Forget About Dr. Pepper

| About: Dr Pepper (DPS)

In a beverage world dominated by Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP), it probably shouldn’t be a surprise that Dr. Pepper Snapple (NYSE:DPS) usually gets treated like the unwanted stepchild in the family. Coke and Pepsi products dominate the market, and both companies have storied histories of almost a half century of dividend growth coupled with significant price appreciation. On the other hand, Dr. Pepper Snapple became a company after the spinoff of Cadbury Schweppes Americas Beverages from the parent company, Cadbury Schweppes just a few years ago. In fact, Coke and Pepsi are the largest distributors of Dr. Pepper, and DPS didn’t even start trading on the New York Stock Exchange [NYSE] until May 7th, 2008. Therefore, it’s easy to see why Coke and Pepsi capture the attention of investors much more so than Dr. Pepper.

But still, Dr. Pepper Snapple has an impressive line-up of drinks: Dr. Pepper, Snapple, Sunkist, 7UP, A&W, Crush, Canada Dry, Hawaiian Punch and a host of others. While Dr. Pepper may have to play second fiddle to Coke and Pepsi for both the foreseeable and unforeseeable future, that does not preclude it from delivering impressive growth to shareholders.

Here is the most recent announcement to come out of headquarters:

Dr Pepper Snapple Group, Inc. today announced that its Board of Directors declared a quarterly dividend of $0.32 per share on the company's common stock. The dividend is payable in U.S. dollars on Jan. 6, 2012, to shareholders of record on Dec. 19, 2011.

In addition, the company announced that its Board of Directors authorized the repurchase of an additional $1 billion of the company's common stock. In total, the company has now authorized $3 billion of share repurchases. Through the third quarter of 2011, the company repurchased approximately $1.5 billion of its common stock.

‘With continued strong free cash flow generation and our focus on organic growth, we remain committed to returning excess cash to our shareholders,’ said Larry Young, DPS president and CEO.

Dr. Pepper doesn’t have much of a dividend record to judge by; the company didn’t initiate a dividend until 2010 ($0.90 annually), and although the raise to $1.14 annually in 2011 is a nice boost to shareholders, Dr. Pepper needs to establish a longer track record before investors can start extrapolating details about the future prospects of the company’s dividend.

But the share buyback announcement gives investors a rough proxy to determine value created with some of the excess profits. In 2008, Dr. Pepper had 253 million shares outstanding, and as of today, the company has 215 million shares. Over a three year stretch, Dr. Pepper has been able to reduce share count by 17.6%, or 5.87% annually. If sustainable, these share buybacks, coupled with high single digit dividend growth, could prove to be quite lucrative to shareholders. This most recent announcement from Dr. Pepper suggests that Dr. Pepper plans to spend $1.5 billion in the next year or two repurchasing shares, which, at an average price of around $35, could take about 42.9 million shares off the market. Given the 215 million shares outstanding, Dr. Pepper stands to retire almost 20% of its shares, which could produce a significant spike in the company’s EPS, and eventually, stock price.

Dr. Pepper has a market cap of $7.5 billion, and so, repurchasing $1.5 billion worth of stock could magnify the company’s gains in earnings per share over the next couple of years. Analysts expect Dr. Pepper to generate $2.75 in earnings for 2011. After the share buyback program finishes, each share will generate $3.30 without even accounting for the company’s future growth. Dr. Pepper currently trades at a 14.1x earnings multiple If that holds up after the share buybacks are complete, the share price ought to rise to $46.53. While Coke and Pepsi might be the more glamorous of the trio, Dr. Pepper is quietly doing its part to maximize shareholder value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.