With Ben Bernanke’s Operation Twist pushing the long-term bond yields even lower, stable and high dividend paying companies like Dr Pepper Snapple (NYSE:DPS) have become dearer to investors. Even though the company’s Q1 results were in line with expectations, the stock has climbed more than 10% so far in 2012. The company has a dividend yield of 3.1%, similar to PepsiCo‘s (NYSE:PEP) and higher than Coca-Cola Co‘s (NYSE:KO). Another reason why investors are ready to pay a premium for Dr Pepper Snapple is because it has no exposure to Europe. The soft drink company operates only in the North American region. With the beverage company scheduled to announce its Q2 earnings on July 26, here are some trends to watch for.
Battling Commodity Inflation
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The incremental cost of higher commodity prices stood at $31 million in the first quarter, which was in-line with the company’s expectations. The company expects the commodity prices to cool down in the latter half of the year and, thus, we could see some margin improvement on a sequential basis. Moreover, the company has been trying to reduce its dependency on commodities through its bottling agreements with Coca-Cola and PepsiCo. Under the bottling agreements, the company will provide beverage concentrates to PepsiCo and Coca Cola, who will then convert into finished product and distribute. The agreements were formed in 2010 for a period of 20 years. Thus, the company’s exposure to packaging products will reduce in the process. The prices of the concentrate are reviewed by Dr Pepper Snapple at least annually which should again add to the stability of its margins.
Volume Growth Critical
Dr Pepper Snapple’s carbonated soft drink (CSD) volumes grew 2% in the first quarter helped by the launch of Dr Pepper TEN in the last quarter of 2011. Hence CSD volumes could again see some positive growth as Dr Pepper TEN reaches its distribution potential. Non-CSD volumes, however, declined 7% as the large price increases of Mott’s and Hawaiian Punch in 2011 deterred consumers from buying the beverages. Within the non-CSD segment, only Snapple continues to experience positive volume growth on a consistent basis. If the company could address its non-CSD woes, we could see some upside in our price estimate.
We estimate a $38.61 price for Dr Pepper Snapple, which is about 10% below the market price.