I love Dr Pepper’s (DPS) original Dr Pepper. I really do. It’s a Texas thing, and it’s in my blood.
I’ve been known to drive 100 miles from Dallas to Waco to obtain “true” Dr Pepper (made with cane sugar), and after being overseas for any length of time, my first stop after leaving the airport isn’t my home. It’s Whataburger.
I leave my suitcase (and sometimes my wife and children) in the car and gorge myself on a disgustingly greasy Whataburger with cheese, wash it down with a large Dr Pepper over crushed ice. Then I go home.
Long live Texas.
Alas, I don’t drink as much Dr Pepper as I used to. I’m too old, and it goes straight to my ever-expanding gut. I might have a couple of sugary soft drinks per month, if that. And I’m not alone. American consumption of soft drinks has been falling for 10 straight years.
Yet interestingly, while Coca-Cola (KO) and Pepsi (PEP) have really struggled with the falling sales of their core soft drinks, Dr Pepper Snapple has managed modest volume growth. Last quarter, DPS grew soft drink sales (which include Dr. Pepper, 7-Up and Schweppes, among a few other smaller brands) by a full percent, and has slowly clawed market share away from Coke and Pepsi.
As a result, spunky underdog DPS stock has absolutely crushed the performance of PEP and KO stock.
DPS stock is up about 80% since September 2013, while PEP is up about 20% and KO has barely budged at all.
Throwing Some BodyArmor on DPS Stock
But being the fastest grower in a shrinking industry is still a losing proposition, which is why the market is abuzz with the news that DPS just made an investment in up-and-coming sports drink BodyArmor, a rival of Pepsi’s Gatorade and Coca-Cola’s Powerade. Dr Pepper’s $20 million investment gives DPS about a 12% interest in the company. (On a side note, Los Angeles Lakers star Kobe Bryant is also a major investor in BodyArmor.)
But BodyArmor is still a niche player in a market that is totally dominated by Gatorade. Recent data shows Gatorade with a 77% share of the sports drink market, which in total does about $6.8 billion in annual sales. BodyArmor did a rather paltry $30 million in sales last year, giving it less than one-half of a percent of the market.
While BodyArmor is a growing brand with loads of potential, it’s not realistically going to be a major driver of revenues for Dr Pepper, which does $6.2 billion in annual sales.
So, where does that leave Dr Pepper; and in particular, where does that leave DPS stock?
In a strict sense, DPS stock is not cheap. But DPS trades at about 19 times next year’s expected earnings, sports some healthy margins and a has a fat return on equity of more than 30%. In addition, DPS stock also yields a respectable 2.3%, and it has been growing its dividend at a nice clip: DPS’s quarterly dividend has more than tripled since 2010, and the company is also aggressively repurchasing its stock.
You’re probably not going to double your money in Dr Pepper Snapple any time soon. But in an overpriced market, I would expect DPS stock to deliver at least respectable total returns over the next year.
As of this writing, Charles Sizemore did not hold a position in any of the aforementioned securities.