3 Reasons Dr Pepper Snapple Group Inc.'s Stock Could Rise

This stock is significantly undervalued versus its peers.

Aug 18, 2014 at 6:00PM

In the world of soda, everyone knows that Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) are the dominant players. But investors shouldn't forget about the No. 3 player in the industry: Dr Pepper Snapple (NYSE:DPS), owner of some very popular brands, including all of those pictured below.

Screen Shot

Source: Dr Pepper Snapple. 

Though it may not be a high-growth company -- revenues are only expected to grow 1% this year -- there's a lot for value and income investors to like in the company's stock. As you'll see below, there's a strong case to be made for investing in Dr Pepper Snapple, especially when compared to its two bigger stalwarts.

A dividend with sustainable growth

While Dr Pepper's current dividend yield is slightly lower than Coke's and Pepsi's, it has shown remarkable growth over the past four years.

Screen Shot

Source: SEC filings.

Some will point out that after the initial jump between 2010 and 2011, Dr Pepper's dividend has grown at a rate about in line with that of the other two companies. That's a fair assessment.

But if we look at how much of each company's free cash flow, or FCF, is being used to pay that dividend, we see that Dr Pepper has more room for growth than Coke or Pepsi.

Screen Shot

Source: SEC filings; represents trailing-12-month figures.

Because Dr Pepper is only using about one-third of its cash flow to pay dividends -- while the other two use over half theirs -- there's a lot more room for Dr Pepper to continue to grow its dividend moving forward.

An opportunity for international expansion

Dr Pepper didn't become a publicly traded company with its current collection of brands until 2008. Before it went public, many of the organization's international opportunities for carbonated beverages were sold. That means that while Coke and Pepsi each get about half of their revenue from outside America, Dr Pepper does 88% of its business stateside.

But as CEO Larry Young recently revealed in an interview on CNBC, the company recently obtained rights to begin entering the Middle East and Far East markets with its Snapple brand of drinks. Though Young was coy about revealing details of the initiative, the opportunity to sell tea in these markets -- which have a strong demand for the product -- could be a driver of revenue growth moving forward.

Significantly underpriced versus the competition

Currently, both Coca-Cola's and PepsiCo's stocks are valued 50% higher than Dr Pepper's. Given the fact that Dr Pepper is growing both revenue and earnings at a faster pace, it seems like the market is underpricing the stock.

Company 

2-Year Revenue Growth

2-Year EPS Growth

P/E

P/FCF

Dr Pepper Snapple

0.8%

14%

17

14

Coca-Cola

0.3%

3.8%

20

21

PepsiCo

(0.1%)

0.3%

21

21

Sources: Yahoo! Finance, E*Trade. Revenue and EPS numbers from FY 2011 to FY 2013.

Either Coke and Pepsi are overvalued, or the market isn't giving enough love to Dr Pepper. Either way, it remains clear that Dr Pepper is the most favorably priced of the big three soda companies.

The bottom line for Dr. Pepper

An investment in Dr Pepper won't be an exciting one, but sometimes the best investments are the most boring. With a fairly valued to underpriced stock, an opportunity for international expansion that could move the revenue needle, and room for significant dividend growth, Dr Pepper's stock is worth looking into for income-minded investors.

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The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute, and it's no doubt why you clicked to read an article about Dr. Pepper.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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