Dr Pepper: Refreshing Growth In A Struggling Industry

| About: Dr Pepper (DPS)


Unfairly overshadowed by Pepsi and Coca Cola.

Limited risk of falling victim to global contraction.

Embracing the health movement.

Searching for Hidden Treasure

Finding high quality, low volatility stocks with inelastic demand is a popular investment strategy to take during times of market volatility and uncertainty. They are referred to as "defensive" stocks for a reason -- that is, they are meant to protect your portfolio with stable earnings, and dividends through stable production, demand, etc. of the company's operations. The most popular defensive stocks are typically found in the Consumer Staples sector. As the name suggests, these are products that the general public won't forgo in the case of a contracting economy.

Soda: it's refreshing, it's tasty, and people buy it. Always. The fact that it's constantly marketed all over the place certainly doesn't hurt. Not to mention that it's always associated with relaxation and happiness - people on the beach, spending time with friends/family, and….babies? Ok, maybe people don't recommend feeding your 11 month old child soda anymore, but you get the idea. People love to buy soda.

When people think of soda stocks, Coca Cola (NYSE:KO) or Pepsi (NYSE:PEP) are most likely to jump to mind at first. However, one could argue that Dr Pepper Snapple (NYSE:DPS) is a great alternative for a variety of reasons.

Avoid the Crowds

First, when everyone crowds their investments into an industry, the stocks' values tend to get pushed higher and may become overvalued. I think that a lot of people are going to buy Coca Cola and Pepsi stock not simply as a portfolio diversification move, but because those two companies get a whole lot more press than Dr Pepper. The 'press', however, is frequently wrong and/or biased.

For all of the 'buy' articles that have been written about Coca Cola and Pepsi over the past 5 years, they are only up 38% and 53%, respectively. In the same time period, Dr Pepper stock has increased by about 130%. Their dividend has also risen by 66%, and its yield is now competitive with that of Coca Cola and Pepsi. If that is not enough, they also boast the lowest P/E and forward P/E ratio of the 3 stocks.

Limited Global Risk

Another argument for investing in DPS is that they are a very geographically concentrated company. Almost 90% of their sales take place in the United States, and the only areas that they distribute their products to outside the country are Canada, Mexico, and the Caribbean.

This is an attractive situation for two reasons. First, that means that they do not have exposure to areas of higher risk that Pepsi and Coca Cola could lose revenue (namely China, India and other emerging markets countries). Second, it means that they have the option to expand into more markets when and where they see fit.

Limiting business to the North American region has proven to be a winning strategy for Dr Pepper in recent years; the foreign operation costs and currency adjustments alone cost Coca Cola and Pepsi millions of dollars.

A Healthy Investment

Lastly, their push to add healthier options to their list of brands should help them boost sales. Not just because they will have more products to sell, but because there is a global cultural shift going on that mandates a healthier lifestyle.

Obviously, people are not going to stop buying soda overnight. If that were true, there would be no reason to write a bullish article on a soft drink company's stock. People are going to keep buying soda, but it has become evident in recent years that there has been declining demand.

So, what has DPS done to react to the inevitably bleak future for soda sales? They're focusing more on promoting their health drink allied brands, which include Bai, Bodyarmor, Aguafiel, and Fiji water. Just last month, they added Core Hydration, another water brand, to their list of allied brands. It's a pretty strategic move, considering water sales in the 1st quarter of 2016 were 22% higher than that of 1st quarter 2015.

This is an excellent growth strategy that could prove to be more efficient than trying to capture global market share. While Coca Cola and Pepsi continue to spend money on more distribution centers and factories in foreign countries, Dr Pepper is working to add new, wholesome, healthy alternative beverages to their rapidly growing list of brands.

Closing Words

In a highly-concentrated industry, it's always good to see a company that differentiates itself by taking on a unique growth strategy relative to its peers. As a result, Dr Pepper has seen higher growth than its main competitors in revenue, profit, stock price, and dividend, all while flying under the radar. They should continue to see this growth due to the absence of globalization risks and their constant search for domestic, high-growth, healthy snack and drink brands that they can partner with and distribute all over the country.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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