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The Science of Hitting
The Science of Hitting
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Dr. Pepper Snapple Conference Notes

September 26, 2011 | About:

Dr. Pepper Snapple (NYSE:DPS), the well known No. 3 player in the soft drink industry (among other categories like tea, juice and mixers), presented at the Barclays Capital Back to School Consumer Conference earlier this month. As many known, carbonated soft drinks (CSDs) in the United States have been on the decline, leaving the industry leaders on a mission to build their non-carb portfolio. However, this has largely been from a decline of colas (down more than 2% in 2010), not flavored CSDs (up almost 1% in 2010), where DPS is the No. 1 player (with a 40% dollar share); in fact, that category has expanded from 46.3% of retail CSD sales dollars in 2005 to 51.5% as of July.

Here are some of the notes from the conference, which outline Dr. Pepper Snapple’s view on the continuation of this trend and how they will position themselves to benefit from the shift in consumer preferences:

The company is number one in a couple of other categories besides flavored CSDs, including premium tea (Snapple has a 50% share), alcohol mixers (Mr. & Mrs. T's and Rose's Cocktail Infusions), and gourmet CSDs (Stewart's and IBC).

While the company’s portfolio consists of more than 50 brands, 14 key brands that drive more than 80% of their branded volume (led by none other than Dr. Pepper).

Management believes that the current share of flavored CSDs (at 51.5%) can grow to 55% of total CSDs by 2015, equal to an additional $4 billion in sales at retail; as noted above, Dr. Pepper Snapple currently holds 40% of that pie, which would be equal to an incremental $1.6 billion in sales. Despite these trends, DPS products only account for 3% of consumer drinking occasions per year (according to Beverage Digest 2010 Fact Book). As a result, management has beefed up brand building efforts, with marketing investments in 2011 increasing $110 million (30%) since 2008, with a focus on key demographics (such as the Hispanic population, which has grown to 50 million in the U.S. and is driving more than 50% of the country’s population growth) that are skewed more towards flavored CSDs. As CEO Larry Young put it, “We believe our portfolio is ideally positioned to win with these consumers.”

Sundrop, the company’s big launch of the year, continues its expansion across the United States: Grocery ACV distribution is now at 90% and convenience is at 55%. This success should bode well for other brands, where the company is working to achieve 90% ACV distribution in grocery for core SKUs.

Over time, management expects these developments to drive long-term net sales growth of 3-5%, net income growth in the mid-single digits, and earnings per share growth in the high-single digits. In addition, the company gives cash back to shareholders via dividends and buybacks, as pointed out by CFO Marty Ellen: “We've been very consistent in returning excess cash to our shareholders and you should expect this to continue. On May 18th, we raised our annual dividend payout by 28% to $1.28 per share. We view this as an initial step towards being able to consistently raise our dividend over time… Last year, we repurchased $1.1 billion of our stock, or 12% of our float, and expect to repurchase $400 million to $500 million of stock this year, subject to market conditions.”

DPS has had some issues creep up as of late, specifically with bottler and employee disagreements; the stock has stalled over the past eighteen months, and is having trouble staying above $40 per share. However, taking that into consideration, the company sports a solid 3.45% dividend yield and has clear plans to grab continued CSD market share from their leadership in flavored. Overall, this may be worth a second look for investors.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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