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4 Reasons Not to Sell Keurig Dr Pepper Stock

By Jon Quast - Mar 15, 2020 at 10:30AM

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When stocks are down broadly, we can lose sight of why we should hang on to certain companies.

By now I'm sure you know stocks are down. Market corrections like these hurt, and that pain motivates us to do irrational things. We just want to fix the problem somehow, and it may seem like selling your favorite stocks is the only solution.

If that's you, a market-beating past performance, a profitable merger, a diverse portfolio, and a good dividend are all great reminders of why not to sell Keurig Dr Pepper (KDP -0.60%) stock while it's down. Let's take a closer look at these four reasons to hold on to this stock.

1. It's a market beater

When investing in stocks, we're looking for companies that can beat the market averages over the long term. Keurig Dr Pepper has less than two years' history as a combined company, but since the merger, it's indeed beat the market, albeit just barely.

KDP Chart

KDP data by YCharts

You're likely aware that the market is selling off due to concerns about COVID-19 and the rapid drop in oil prices. But Keurig Dr Pepper's stock dropped for an unrelated reason. On March 4, the company announced a secondary stock offering that was completed on March 9. The offering increased the stock's float by about 2.3% -- a minimal increase, but at an inopportune moment considering the broader market was falling.

Can Keurig Dr Pepper keep beating the market? Consider that its earnings per share (EPS) for 2019 came in at $1.22 per diluted share, which was the high end of its guidance. This was annual EPS growth of 17% -- ahead of the company's baseline long-term EPS guidance of 15% annual growth. Strong EPS growth and a falling stock price mean that Keurig Dr Pepper trades at less than 20 times forward earnings, below several peers. That means this stock offers both value and growth -- a solid case for beating the market going forward.

2. The merger is profitable

Keurig Dr Pepper is the combination of two formerly separate companies: Keurig Green Mountain and Dr Pepper Snapple Group. The merger, besides simply creating a more diversified product portfolio, allows for certain operational savings. In 2019, Keurig Dr Pepper grew earnings faster than revenue due to $200 million in merger-related synergies.

This puts Keurig Dr Pepper on pace to hit its three-year goal of $600 million in annual operational savings, boosting EPS over 15% each year. 

Operational weakness can be a good reason to kick a stock out of your portfolio. But in Keurig Dr Pepper's case, its operations are improving because of the decision to merge.

Multiple shelves in a grocery store with Keurig Dr Pepper products.

Image source: Keurig Dr Pepper.

3. A small company with a big portfolio

The casual observer may not realize how far Keurig Dr Pepper's portfolio extends beyond just coffee makers and its namesake Dr Pepper brand. This company's products include carbonated drinks 7UP and A&W, and coffee brands such as Donut Shop and Peet's Coffee. All told it has over 125 brands, including its recent acquisition of regional favorite Big Red.

Diversity is important. Consider that Coca-Cola has a broad drink portfolio, and still feels the need to branch out further. In 2018, Coca-Cola shelled out $5 billion for Costa Coffee to offer beverage options in one of the only non-alcoholic drink categories where it didn't already have a compelling product. Since then it has merged coffee and soda, a move that PepsiCo followed with Pepsi Café

If the biggest drink companies value continued product diversity, then be sure that it's important. With a market capitalization of just $38 billion, compared to $243 billion for Coca-Cola and $192 billion for Pepsi, investors could easily forget how well Keurig Dr Pepper's product lineup compares to its massive rivals. But forgetting this strength would be a mistake.

4. A healthy dividend

Keurig Dr Pepper's strong earnings allow it to pay a healthy dividend that currently yields about 2.5%. Since the merger, the company hasn't missed a dividend, but it also hasn't raised it. Considering its payout ratio is under 50%, and its earnings are growing, I would expect a dividend increase at some point soon.

For now, the falling stock price can actually be a good thing for long-term shareholders with a dividend reinvestment plan. Many brokers offer this plan, and those reinvested gains can dramatically increase your overall return the longer you hold -- further motivation to not sell those shares just because they're down.

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Stocks Mentioned

Keurig Green Mountain, Inc. Stock Quote
Keurig Green Mountain, Inc.
KDP
$35.28 (-0.60%) $0.21
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$62.55 (-0.29%) $0.18
Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
$166.51 (-0.13%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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