My lifestyle is set up to like Keurig Dr Pepper (NYSE:KDP). What I mean by that is my wife, from Texas where the drink originated, is a lifelong Dr. Pepper drinker. We also have a Keurig coffee machine, and I’m enjoying a pod coffee as I write this … but that doesn’t mean I’m going to buy KDP stock.
Since it was formed at the end of July, KDP stock has outperformed its larger rivals, Pepsi (NYSE:PEP) and Coca-Cola (NYSE:KO). But its results still lackluster, and a downgrade from Morgan Stanley (NYSE:MS), which sees the single-serve coffee fad fizzling, recently sent it down by 4%.
Even at that price, it’s no bargain. The company’s dividend of 15 cents gives it a yield of 2.19%. In a slow-growth area like beverages, you buy stocks for dividends, not growth. Despite the caffeine jolt of the Keurig merger, this remains at heart a third-rate soda company.
The Background
KDP was formed last year when JAB Holdings, which had taken Keurig Green Mountain private in 2015 for $13.9 billion, used it and cash to buy publicly traded Dr Pepper Snapple Group. DPS stock holders got a special dividend of $103.75 per share.
The resulting company is the 4th largest U.S.-based beverage company, behind Pepsi, Coke and Constellation Brands (NYSE:STZ), the beer and wine outfit. It’s the 10th largest beverage company in the world, less than half as large as Starbucks (NASDAQ:SBUX), and Nestle S.A. (OTCMKTS:NSRGY), the leaders in coffee.
About one-fifth of the revenue comes from distributing other drinks, through a group called Allied Brands. After the merger, Allied lost one of its biggest sellers, Fiji Water, which decided to build its own distribution network, and bought Big Red, another Texas soda, for $200 million.
It was the distribution network that attracted the German Riemann family to the company. It controls a host of coffee and restaurant brands through its JAB Holding and holds 87% of Keurig Dr Pepper.
Where’s the Growth?
The stock got out of the gates quickly and outperformed its larger rivals until it got hit with the double-whammy this year. First came its 2018 earnings report, delivered at the end of February, and then came the Morgan Stanley downgrade.
The numbers weren’t bad. They just weren’t great. Earnings for the quarter were $266 million, 19 cents per share, on revenue of $2.81 billion. Wall Street turned thumbs-down on the numbers, the stock falling to as low as $25 per share.
A report last month that it was working with Anheuser-Busch Inbev (NYSE:BUD) on an electric cocktail machine, which sounds like the Keurig Kold machine discontinued in 2016, lifted the shares until the Morgan Stanley analysis sent them back down.
After the smoke has cleared, you have the third-leading sugary soda company which, while it has a solid distribution network, is still inferior as a stock to its leading rivals. Instead of paying 50 times earnings for a company with $7.4 billion in revenue, and a paltry dividend, investors might pay just 14 times earnings for Pepsi with its 3% yield or 31 times earnings for Coke and its yield of 3.44%.
The Bottom Line on KDP Stock
KDP stock was always a bet on growth, and its growth prospects from here are not outstanding.
If Keurig really has topped out, you’ve got a bunch of sugary sodas and a distribution network that trails rivals and likely always will. I enjoy a cup of coffee and a sugary drink as much as the next man, but as for buying the space, look elsewhere.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
