Goldman Sachs strategist recently came up with a report in which he sees subdued return from stock price appreciation going forward. According to him,
“The historical relationship between the cyclically-adjusted P/E multiple (currently 23.4x) and forward equity returns suggest the prospective 10-year annualized total return for the S&P 500 will be 5%. Dividend levels implied by the swap market suggest that 46% of the total return during the next ten years will be derived from dividends, and 54% from price gain.”
In the next 12-month, he see no price appreciation in stock and believes that dividends will account for all of the S&P500 return. In his report, he wrote:
“The market will rise to 2,150 by mid-year but fade after the Fed raises interest rates in September for the first time in nine years. Our year end forecast is 2,100 and our 12-month target equals 2,125.”
Goldman's analyst recommended investors to purchase its dividend basket of 50 stocks to get better returns. He also added 10 new stocks to the dividend basket which are attractively valued and have high dividend yields. Dr. Pepper Snapple (DPS, Financial) is one of the highest yielding new additions to that basket. The company is trading at a forward PE of 18.43 and has a dividend yield of 2.50%. Here’s a look at the company in detail.
Dr Pepper Snapple Group is a leading integrated brand owner, manufacturer and distributor of non-alcoholic beverages in the United States, Canada and Mexico with a diverse portfolio of flavored (non-cola) carbonated soft drinks and non-carbonated beverages, including ready-to-drink teas, juices, juice drinks, water and mixers. Approximately 84% of the company's volume comes from brands that are either #1 or #2 in their category. The company posted $6.1 billion of net sales in 2014 with the U.S. contributing ~88% of the revenues.
Last month, Dr Pepper Snapple Group posted strong first quarter results with its EPS and revenues both beating consensus estimates. While the company posted revenues of $1.45 bn ($30 mn beat), its Q1 EPS stood at $0.81 (5 cents beat). Dr Pepper Snapple’s share price has seen a good run over the past year. The company's stock has gained 36%, while S&P 500 is up 12% in the same period.
The company has posted an impressive earnings growth over the last few years and its diluted EPS has increased by 64% in the last five years. In addition to good financial performance, management is also doing a good job in terms of returning cash to the shareholders. The company has increased its dividend by 82% in the last five years. Last year, it returned $717 million to the shareholders through dividend and buy backs.
The company is benefiting from the Rapid Continuous Improvement (RCI) initiative it launched in 2011. This initiative uses Lean and Six Sigma methods to deliver customer value and improve productivity. The company is using RCI as a means to achieve net income growth and increase the amount of cash returned to its shareholders. It has been able to create multi-product manufacturing facilities which provide a region with a wide variety of its products at reduced transportation and co-packaging costs. In 2014, under RCI initiative, the company worked collectively with its bottling partners to improve display tie-in rates on Dr Pepper, increase distribution on single-serve juice and streamlined its driver check-in and checkout processes. To date, RCI has helped the company generate $200 million in annualized cash productivity savings.
Going forward, we can expect the continued roll-out of RCI initiative to benefit Dr Pepper. The company is also expected to continue building its brands, execute with excellence in marketplace, engage its consumers through relevant programming, and provide them with innovative products and package formats to meet their evolving lifestyle.
In 2015, the company is expanding the test of naturally sweetened carbonated soft drinks to three key regional markets and launching Snapple Straight Up Tea, a new line of unsweetened and slightly sweetened teas, in 18.5-ounce PET bottles. The company is also expanding distribution of its glass bottle carbonated soft drinks, launching Hawaiian Punch in a pouch format and bringing Penafiel mineral water brand to the U.S. More importantly, the company plans to continue its focus on RCI and develop lean capabilities across the organization.
Dr Pepper's EPS is expected to grow 6.30% in the current year and 6.96% next year. The company has a healthy forward dividend yield of 2.50% and expects to return between $500 million and $550 million in 2015 through share buybacks. The stock is trading at 18.43 times forward PE. I believe it is a good dividend growth stock to have in your portfolio.
