Growth Prospects
Dr Pepper Snapple Group Inc. (NYSE:DPS)’s revenue growth comes primarily though increasing market share of its primary brands.
The company accomplishes this through advertising spending. Dr. Pepper Snapple Group has spent between $470 and $490 million each year on advertising in each of its last 3 fiscal years. The company spends approximately 8% of sales on advertising.
Dr. Pepper Snapple’s earnings-per-share growth will come from a mixture of share repurchases, efficiency gains, and revenue growth.
Since the company’s spin-off, Dr. Pepper Snapple Group has reduced its share count at 3.8% a year.
Dr. Pepper Snapple Group has done much to increase efficiency and margins as well. The company focuses on continuous improvement. This has resulted in returns on equity growing from 18.0% in 2008 to 30.6% in 2014.
In total, Dr. Pepper Snapple Group has compounded its earnings-per-share at 10.3% a year since becoming a standalone company.
Recent results are in line with historical results. The company grew adjusted earnings-per-share 14% in fiscal 2014. Constant-currency adjusted earnings-per-share are expected to grow by around 10% in fiscal 2015.
Dr. Pepper Snapple Group is significantly smaller The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP). Despite being direct competitors with its two larger rivals, Dr. Pepper Snapple Group actually partners with them. The following is taken directly from Dr. Pepper Snapple’s 2014 annual report:
“On February 26, 2010, we completed the licensing of certain brands to PepsiCo following PepsiCo’s acquisition of Pepsi Bottling Group and PepsiAmericas, Inc. The agreements have an initial period of20 years with automatic 20-year renewal periods and require PepsiCo to meet certain performance conditions.
On October 4, 2010, we completed the licensing of certain brands to Coca-Cola following Coca-Cola’s acquisition of CocaCola Enterprises’ NorthAmerican Bottling Business and executed separate agreements pursuant to which Coca-Cola began offering Dr Pepper and Diet Dr Pepper in local fountain accounts and its Freestyle fountain program. The agreements have an initial period of 20 years with automatic 20-year renewal periods and require Coca-Cola to meet certain performance conditions. Under a separate agreement, Coca-Cola has agreed to include Dr Pepper and Diet Dr Pepper brands in its Freestyle fountain program. The Freestyle fountain program agreement has a period of 20 years.”
As you can see, the relationship between Dr. Pepper Snapple Group and its large rivals is far from heated. Both PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Co (NYSE:KO) actually partner with Dr. Pepper Snapple Group in deals that are mutually beneficial for the companies involved.
Going forward, I expect Dr. Pepper Snapple to continue compounding its earnings-per-share at between 7% and 11% a year. Growth will come from:
- Revenue growth (3% to 5%)
- Share repurchases (3% to 4%)
- Margin improvements (1% to 2%)
Dividends, Total Return, & Valuation
As noted above, Dr. Pepper Snapple Group returns large amounts of cash to its shareholders through share repurchases.
The company also has a shareholder friendly dividend policy.
