Most consumers walk up to a soda fountain or a convenience store refrigerator with little more than just a desire to purchase and consume their favorite soft drink. However, there is an entire financial world behind each brand name beverage, some just waiting to offer potential investors returns beyond the mere pleasure of a good soft drink. One such brand is Dr. Pepper Snapple Group (DPS), which after a soft third-quarter, is best suited for dividend growth investors with a long-term perspective.
On October 24, 2012, the company reported their third-quarter 2012 earnings. Earnings per share grew to $0.84 cents per share, up almost 13% from 2011 third-quarter earnings of $0.71 cents per share. Sales volume decreased, but this was offset by higher prices, leading to net income increasing 16% to $179 million. Ultimately, however, sales are still up 2% for the year-to-date, compared to the same time in 2011. Finally, net income increased to $459 million compared to $440 million in 2011. Looking forward, the company offered guidance of 2% total sales growth for all four quarters of 2012, a core EPS of $2.90 - $2.98 for the full year, and noted that packaging and ingredient costs will rise 2%, as well.
While earnings did not amaze anybody nor suggest a huge growth story, the earnings conference provided optimistic insight looking forward. The Chief Executive Officer, Larry D. Young, pointed out that sales of Dr. Pepper brands are tied greatly to the improvement of the economy, which Young predicts will steadily improve especially after the upcoming election. Additionally, the company is seeing growth in the sales and promotion of the flavors of drinks it offers, proven by its third-quarter increase of 4% in sales of beverage concentrates and a noteworthy increase in consumption of the relatively new Dr. Pepper TEN flavor. Total sales volume, however, was down 3%.
In summary, it was a disapointing quarter with mixed details amongst each product line, suggesting neither a positive nor negative sentiment.
Judging by the earnings call, the quarter was weak. While some things, such as Latin American sales, were up, others were down, such as sales volume. The numbers, however, were not particularly earth shattering, as the greatest change was 7%, which is the amount Latin American sales increased. The CEO attributed the results mostly due to a weak global economy, a common reason behind most disappointing earnings recently. When asked about long-term growth of 3-5%, the Chief Financial Officer, Martin M. Ellen stated,
Do we believe the top end of the range is challenging? Certainly. But you could easily get there.
There is no doubt that it can be difficult to grow a staple product, such as soft drinks, without making radical changes to the base business. The company seeks to grow by providing increased presence in fountain soda dispensers, such as in restaurants and convenience stores, and by growing in highly-profitable markets, such as energy drinks and teas in its Snapple product line.
However, as suggested by the CFO, it can be difficult for the company to grow significantly, even in light of overcoming forecasted challenges. Some growth is definitely better than none, and Dr Pepper Snapple Group will certainly grow, but on a very limited scale compared to past years. This is reflected in the stock price, which after almost tripling from 2009-2011, has slowed in the past 52-weeks to a return of 14%, and has begun to drop since July 2012 after an extended period of continuous increases.
Too Generic to Judge
The problem lies in the fact that the company's growth strategy is unclear and vague. The company has not released any suggestions that it will expand further internationally, which currently involves presence in Mexico, Canada, and the Carribbean. Additionally, the Dr. Pepper TEN brand, which was introduced in 2011 and hoped to be a growth opportunity for the company, is falling short of expectations as people "think TEN is an extension to Dr. Pepper [but] it's not," according to the CEO in the conference call.
Further analyzing the conference call, the company braces for increased apple prices, which will hurt its Mott brand beverages and Snapple teas. All things being said, the bullish views from management involve redesigning the way products are sold and marketed, such as Hawaiian Punch brand being introduced in 32-ounce bottles and 10-12 pack sets of varying ounces, compared to only one purchase point and size. This can be a limited source of growth without introducing new ideas or concepts, since there is no inherently troublesome aspect to current operations that provide profound improvements if corrected.
Dividends: Reason to Hold
For those searching for dividend growth investments, the stock has delivered consistently well. The Chief Financial Officer had this to say:
With respect to the allocation of free cash flow between share repurchases and dividends, I've told many of you when I've been out on the road that we like our balance now, but believe that we have the ability to raise our dividend over time to create a track record as a company that is able to do that. I cannot speak for the board. The board will take this subject up in earnest once a year, as they do, in the early part of 2013.
This suggests that another dividend increase may be in store, and with a dividend history of almost 100% increase, it is reasonable to expect another increase to become reality. It is important to note, however, investors still have several months before it is clear the path the dividend will take, as suggested by the CFO's suggestion that it will be discussed in early 2013. As of now, the stock yields 3.2% at a P/E of 14.63-all good fundamentals. Any growth in the dividend will provide even more of a solid, affordable dividend paying stock.
The simple lack of a clear, ambitious growth strategy, a lack of international expansion plans, and sales improvement efforts relying on mostly improving existing brands rather than expanding to new ideas and products makes Dr Pepper Snapple Group a stock with an unclear future. For now, however, as investors wait to find out what 2013 brings, the dividend is a reason to hold on and wait without buying more or selling some just yet, and for those without shares, a beta of -0.13 provides ample time to sit on the sidelines and wait to see if DPS is right for you, or not.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.