Dr Pepper Snapple Group Inc. (DPS) is at a good entry point for investors, as the company is cheaper than its competitors The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) and is showing 3.3% dividend yield and cash flow growth while making efforts to drive growth through the launch of the TEN format and the strengthening of certain brands, says David Abella, Senior Portfolio Manager at Rochdale Investment Management.
“[DPS] is a smaller beverage company and at 15 times earnings, it’s a lot cheaper than rivals Coca-Cola and Pepsi, great companies but a little pricier at 19 times earnings. So it has a dividend yield of 3.3%. They grew their dividend 12% last year. I think high-single-digit dividend growth is very reasonable going forward given the cash flow growth. It’s been a steady stock performer over the last couple of years, but at 7% to 8% off of its high in mid-May, I think that makes it a good entry point for investors who haven’t been in the stock,” Abella said.
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DPS is also making efforts to increase productivity and strengthen its brands, including introducing a 10-calorie soft drink, and the company should continue to benefit from the improvement of the commodity environment, Abella says.
“They have something called the TEN format, which would be 10 calories in the soft drink, and that has improved flavor and it’s had some really solid test results in the rollouts. The diet versions of soft drinks just don’t have the same market share as the nondiet versions, and yet there are worries about calories and sugar. So I think if the TEN format works out for Dr. Pepper Snapple, that could be pretty interesting. And meanwhile they are trying to reinvigorate certain brands, such as Snapple, which was a big brand once upon a time, still a great product, but trying to get that old magic back…But bottom line, I think that they can do better in terms of cash flow and dividend growth with a stronger economy,” Abella said.
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