There are considerations. The Coca-Cola Company (KO), an outsized peer, has been underperforming, though it maintains one of the highest industry multiples. Its results may not bode well for DPS. It also is not clear how much of an effect Soda Stream International (SODA), which offers homemade carbonated beverages, might have on the future revenues soft drink companies.
Some graphics from Doctor Pepper Snapple's second quarter investor presentation illustrates reasons for hesitation. Aside from Snapple and Mott's, bottler case sales volume is decelerating.
While the company does an admirable job returning cash to shareholders, its balance sheet appears weak. Data from July 2013 shows $113 million in cash against $2.5 billion in long term debt. The Altman Z-Score is 2.08, and graphically in the grey area. Distress could manifest within two years. Noting the foot note below, $531 million in second quarter cash from operating activities is due to licensing agreements with Coke and Pepsi.
Thomson First Call shows a 2.7 analyst recommendation with a median price target of $50. The analysts project $3.28 in 2014 earnings and a 7.53% five-year growth rate, which is not of itself a bargain, nor expensive. Overall, they find it to be slightly out of favor with some upside.
The top mutual fund manager, Peter Lynch, may have liked this stock, however. According to his formula for fair value, the DPS is worth $73.05. A case might be made for value.
There are some gurus aboard. Ray Dalio has a small position opened on June 30. Joel Greenblatt has been building one since 2011. Meridian Funds also makes DPS 0.02% of its portfolio.
However, there is a lack of catalysts and no obvious reason for shares to appreciate. There has not been significant buying amongst insiders. From my perspective, it is going to require a lower stock price or higher dividend yield to make DPS worthwhile.
After this quarter, it should have paid $0.38 four consecutive times, and an increase should be increasingly probable. The corporation’s three-year growth rate leads the industry. If the stock trades at under $44 it would be more compelling; its 52 week low is $42.10. Hypothetically, if shares are purchased at $43, the yield would be 3.5%, and with an increase to $0.40, 3.72%. It is a situation worth monitoring because the payout ratio is around 50%, indicating that the payments are sustainable — though cash flow from operating activities is trending low.
DPS returns capital to shareholders, making it appealing for ownership. However, the company itself is not indicating that high performance is likely. Therefore, it seems better to forgo an imminent dividend payment and wait for a better deal to present itself.