Is Dr. Pepper Snapple Stock a Buy or a Sell?

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Dr. Pepper Snapple Group (DPS) isn’t the first soft drink company most investors think of, considering its $17 billion market cap is a fraction of the $190 billion value of The Coca-Cola Co (KO) or its $150 billion rival PepsiCo (PEP).

But bigger isn’t always better. In the past 12 months, DPS stock has outperformed both of its larger competitors with a roughly 15% return. That compares with about 9% for both Pepsi and Coca-Cola stock, and a 1% loss for the S&P 500.

Longer-term, the outperformance is even more pronounced, with a 130% gain since spring 2011 for Dr. Pepper Snapple, doubling the S&P 500 and blowing away the 50% or so gained by PEP stock and the 30% or so gained by KO.

But past performance isn’t necessarily an indicator of future returns. So can investors still believe in Dr. Pepper Snapple Group here?

Pros of DPS Stock

On the plus side, Dr. Pepper Snapple clearly is in growth mode. Just yesterday, DPS reported another strong quarter that sent shares higher. Revenue has moved higher year-over-year in nine consecutive quarters, while Coca-Cola and Pepsi have both seen significant headwinds on the top line.

Furthermore, DPS issued strong guidance in the high end of its previous range with a target of $4.20 to $4.30 in FY2016 earnings.

When you have strong fundamentals and strong share price momentum, you are in good shape — particularly in a volatile stock market environment where investors have few good options.

Also, the company is very much a U.S. focused enterprise. According to segment information, only $497 million of the $6.2 billion in revenue recorded by DPS in FY2015 — or less than 8% of sales — was booked outside the U.S. and Canada. This allows the company to be insulated from international pressures that include a strong dollar holding back profit margins abroad, or demand issues in markets like China and Europe where consumers may not be feeling all that confident lately.

Consider that Coca-Cola Co., by contrast, booked revenue in 72 functional currencies in fiscal 2015 and did more than half of its net operating revenue outside North America.

To top it off, the company pays a 70.25-cent dividend each quarter that equates to $2.81 annually — good for a 2.7% yield that is about 60% of earnings and thus ripe for future increases as DPS grows.

Pricey, But Still Better Than Pepsi or Coke

Of course, investing in DPS stock is not a slam dunk. There are risks that should give investors pause.

For starters, the 2.7% dividend is nice but well under the 3.1% offered by consumer powerhouse Coke. If you’re looking for long-term income potential with a stable world-class brand, the entrenched nature of KO stock would be appealing above DPS to most investors.

However, there is not just better growth but better value in Dr. Pepper Snapple Group right now. Consider that Coca-Cola trades for almost 22-times forward earnings and PepsiCo trades above 20-times forward earnings, vs. a forward P/E of about 19 for DPS stock.

When you get more growth at a smaller earnings multiple, leaving a little yield on the table seems more than enough of a trade-off.

The biggest risk seems to be the secular headwind of declining soft drink consumption. If it is true that consumers are really moving away from soda altogether, then DPS may eventually hit a snag. However, even this risk seems to be mitigated by its very name — with Snapple fruit juices helping to diversify the company, as well as other offerings under the corporate umbrella that include Motts apple juice and Nantucket Nectars.

All in all, you could do much worse with a consumer play than Dr. Pepper Snapple stock right now. That’s particularly true after Wednesday’s strong earnings report.

Jeff Reeves

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