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Pim Keulen
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I started trading on a permanent scale two years ago. My goal is to create a stable portfolio over a period of time, whichs generates good stock- and dividend returns. I have a fundamentel approach towards investments decisions.
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  • Dr Pepper Snapple Group Effective Tax Rate: A Weakness And An Opportunity? 0 comments
    Nov 5, 2013 11:32 AM | about stocks: DPS, KO, PEP

    In a world of globalization and global expansion most companies are looking for international growth. Not so much for soft-beverage company Dr Pepper Snapple Group (hereafter: DPS). DPS is the no. 1 flavored carbonated soft drink company in the Americas, with operations across the United States, Mexico, the Caribbean and Canada. Their mission is, according to their corporate website: "Be the Best Beverage Business in the Americas."

    DPS third quarter earnings came in October 23, 2013. The company reported 1% increase in net sales and 20% increase in reported earnings-per-share for the third quarter year-on-year. The company expects full year net sales to be around flat and core earnings to be in the $3.04 to $3.12 range. Current Forward P/E ratio stands at 15.25. DPS pays a quarterly dividend, of $0.38 (2012: $0.34; up 11%), a yield of 3.20%.

    DPS is known for its flavored beverages. Their brand portfolio includes 7UP, A&W, Canada Dry, Clamato, Crush, Hawaiian Punch, Mott's, Mr & Mrs T mixers, Penafiel, Rose's, Schweppes, Squirt and Sunkist soda. The company focuses on building, improving and strengthening current market position of their brands in existing markets. Improving operating efficiency and distribution channels should contribute to better operation margins in the future.

    It is clear DPS strategy is different from competitors like The Coca-Cola Company and Pepsico. These two competitors are looking at a more global strategy and anticipate future growth to come from emerging markets. The global strategy enables the two companies to distribute their profits to countries with low tax rates compared to DPS's American strategy.

    According to the press release attached to the third quarter earnings report, DPS core effective tax rate in the third quarter of 2013 amounts 35.5%. Core effective tax rate is defined as the effective tax rate on core earnings. Effective tax rates for The Coca-Cola Company (27.4%) and Pepsico (25.5%) in the third quarter of 2013 are significantly lower then DPS effective tax rate.

    As a result of the strategy to focus on American markets, DPS is currently unable to benefit from lower corporate tax rates abroad. It is fair to say corporate tax in the United States causes competitive disadvantage for DPS considering the significantly lower effective tax rates for more global oriented companies like The Coca-Cola Company and Pepsico.

    However, DPS current competitive disadvantage could turn out to be a great opportunity to create more value for the shareholders. I would like to see DPS considering a more global approach regarding future growth. In my opinion a more global approach triggers a multiplier effect in earnings-per-share growth.

    First of all DPS will increase revenue because the company enters new and fast-growing markets, for example: Africa and Asia. DPS earnings-per-share could grow even faster, because DPS will benefit from lower corporate tax rates in countries abroad. Earnings-per-share could potentially grow by 10%, as a result of lower tax rates (difference between DPS and Pepsico effective tax rate in the third quarter of 2013).

    All factors combined I would consider DPS as a long-term investment, given the current valuation and dividend return (P/E: 15.26; Yield: 3.20%). Considering current valuations of The Coca-Cola Company (P/E: 20.48; Yield: 2.80%) and Pepsico (P/E: 19.81; Yield: 2,70%) my initial target for DPS shares is $56 per share, excluding an international strategy.

    In my opinion DPS has great earnings-per-share growth potential if the company should consider a more global strategy. Earnings-per-share could further benefit from increase in revenue (new and fast-growing markets) and lower tax rates. Including an international strategy my target for DPS shares would be around $68 per share.

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

    Stocks: DPS, KO, PEP
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