Soda Wars Part 2: Dr. Pepper Snapple vs. Monster Beverage - Sure Dividend Sure Dividend

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Soda Wars Part 2: Dr. Pepper Snapple vs. Monster Beverage

Published by Bob Ciura on March 23rd, 2017

The sparkling beverage industry is fiercely competitive. The two biggest companies, PepsiCo (PEP) and Coca-Cola (KO), are engaged in a never-ending battle for industry domination.

Right behind them, are Dr. Pepper Snapple (DPS) and Monster Beverage (MNST).

Dr. Pepper Snapple is a more direct competitor with the “Big 2” soda companies, but Monster has Coca-Cola as a major financial backer: Coca-Cola owns approximately 16.7% of Monster.

Monster is a high-growth company. But for income investors, the stock leaves a lot to be desired—Monster pays no dividend.

Dr. Pepper Snapple does pay a dividend, although it has not raised its dividend long enough to qualify as a Dividend Achiever, a group of 271 stocks with 10+ years of consecutive dividend increases.

You can see the full Dividend Achievers List here.

This is not because Dr. Pepper Snapple is lacking when it comes to dividends—it has only been a stand-alone, publicly-traded company since 2008.

This article will discuss three reasons why I prefer Dr. Pepper Snapple stock to Monster.

Reason #1: Diverse Product Portfolio

The first reason why I prefer Dr. Pepper Snapple to Monster, is because of Dr. Pepper Snapple’s larger and more diverse product portfolio.

Dr. Pepper Snapple, in its current form, came together as a result of the 2008 spin-off by Cadbury.

Today, Dr. Pepper Snapple has more than 50 brands in its portfolio.

Its products encompass the full beverage spectrum, including carbonated and non-carbonated drinks, such as soda, water, teas, and juices.

DPS Brands

Source: 2016 Annual Report, page 5

Many of its products are highly popular, well-known brands, such as Dr. Pepper, Snapple, 7UP, and more.

Of these, six are among the top-10 non-cola soft drinks, and 13 of its top 14 brands are either #1 or #2 in their respective flavor categories.

Its brand strength provides Dr. Pepper Snapple with pricing power, which helps the company grow revenue, even if volumes stagnate.

For example, price increases helped provide Dr. Pepper with 3% growth in the fourth quarter, which helped offset flat volume growth.

DPS Price

Source: 4Q Earnings Presentation, page 4

And, Dr. Pepper Snapple will soon broaden its portfolio even more, once its $1.7 billion acquisition of Bai Brands closes.

Bai Brands is a leading seller of flavored water. It is expected to generate approximately $425 million in net sales in 2017. Dr. Pepper Snapple forecasts the deal will be accretive to earnings-per-share in 2018.

By comparison, Monster has a much more focused brand portfolio, based entirely on energy drinks.

MNST Monster

Source: Investor Relations

This could leave Monster at a disadvantage, because having a broader product line gives companies diversification, particularly for those operating in the consumer goods sector.

Consumer tastes can change rapidly and without warning. If consumers shift away from energy drinks at any point in the future, Monster would be extremely vulnerable.

Reason #2: Dividends

Dr. Pepper Snapple currently pays a dividend of $2.32 per share annualized. This amounts to a 2.3% dividend yield, based on its recent share price.

Its dividend yield is slightly above the market average. For example, the S&P 500 Index has an average dividend yield of 2%.

In addition, Dr. Pepper Snapple is a strong dividend growth stock.

The company recently raised its dividend by 9.4%. Over the past five years, Dr. Pepper Snapple has increased its dividend by an average of 11% per year.

DPS Capital

Source: Overview Presentation, page 22

With a double-digit dividend growth rate each year, shareholders can generate a high yield on cost over time.

For example, if an investor starts with a 2.3% dividend yield, and the company raises its dividend by 11% per year, in 10 years the investor will generate a 6.5% yield on cost.

This is not an unrealistic projection. Double-digit dividend growth is entirely possible for Dr. Pepper Snapple, since its current annual dividend represents 53% of last year’s earnings-per-share.

A payout ratio slightly above 50% is fairly modest, and leaves plenty of room for 10% annual dividend growth going forward.

Dr. Pepper Snapple also utilizes stock buybacks to reward shareholders. In all, the company returns 100% of free cash flow to investors.

Dr. Pepper Snapple’s dividend is a huge advantage over Monster, which doesn’t pay a dividend at all. Instead, Monster prefers to reinvest virtually all of its cash flow back into the business.

Excess cash flow is utilized for share repurchases, including a recent $500 million buyback authorization, which help boost earnings-per-share growth.

Nevertheless, by choosing not to pay a dividend, Monster does not endear itself to income investors.

Reason #3: Valuation

Lastly, Dr. Pepper Snapple is a more attractive stock than Monster, because of valuation.

Dr. Pepper Snapple generated core earnings-per-share of $4.39 in 2016, up 9% from 2015. Excluding the effects of foreign exchange fluctuations, organic revenue increased 4%.

As a result, the stock trades for a price-to-earnings ratio of 22.

Dr. Pepper Snapple shares are slightly undervalued, in relation to the S&P 500 Index, which has an average price-to-earnings ratio of 26.

On the other hand, Monster stock is much more aggressively priced.

In 2016, Monster generated earnings-per-share of $1.19, up 25% from the previous year. There were many drivers of this growth, most importantly a 12% increase in sales.

In addition, Monster’s gross profit margin expanded by 370 basis points for the year. Operating expenses were reduced by 4.8% in 2016.

Based on its 2016 earnings-per-share, Monster stock trades for a price-to-earnings ratio of 39.

It is reasonable for a high-growth company to trade for a premium valuation.

But with such a high price-to-earnings multiple, and no dividend, Monster does not offer many margins of safety for investors.

Final Thoughts

Both Dr. Pepper Snapple and Monster are highly profitable companies, with leading brands in their respective product categories.

And, both companies are growing sales and earnings-per-share.

Due to its high rates of revenue and earnings-per-share growth, Monster is an attractive option for growth investors. Nevertheless, it doesn’t pay a dividend.

As a result, for dividend growth investors, Dr. Pepper Snapple is a far better stock to buy.

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