Is This Beverage Company a Better Investment than Coke?
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dr Pepper Snapple Group (NYSE: DPS) is doing everything it can to keep up with industry trends. However, it might not be doing enough to keep up with its peers.
The American consumer is more health-conscious than ever before. You have probably heard or read that statement more than a dozen times over the past several years. If you dissect that statement, however, there’s a problem. If the American Heart Association estimates that approximately 33% of the population is obese, then that segment of the population obviously isn’t very health-conscious. You’re still going to find scores of people walking out of the grocery store with cases of soda. From a business and investing standpoint, the problem is simply that growth for carbonated beverages has slowed.
Fat and sugar are out for the health and image-conscious. It has been “discovered” that an overconsumption of sugar can lead to health risks. Of course, overconsumption of anything can lead to health risks, but hey, the trend is the trend, and that’s where you want to be. Carbonated beverages are taking it on the chin.
This industry trend has led to Dr Pepper introducing its "TEN" low-calorie drinks, including 7UP TEN, A&W TEN, Sunkist TEN, RC TEN, and Canada Dry TEN. All of these drinks have only 10 calories per 12 fluid ounces and use non-calorie sweeteners.
Coca-Cola (NYSE: KO) is also going along with industry trends by focusing more on healthier alternatives like Minute Maid and its Simply juice line. Likewise, Pepsi (NYSE: PEP) offers Pepsi Next -- a low-calorie and low-sugar drink with natural sweeteners. Pepsi Next did over $100 million in sales last year.
Of the three companies mentioned here, Pepsi has the best head start on the health angle as it also sells Quaker products, Tropicana juices, and Gatorade.
According to Beverage Digest, Coke owns 34% of the soft drink market share, Pepsi owns 26.3% of the market share, and Dr Pepper owns 11% of the market share.
For Pepsi, not owning as much soft drink market share is no big deal, simply because it’s such a massive player in the snack category. For Dr Pepper, it proves that the company is well behind peers. It’s also behind peers in an area that isn’t often looked at, which we'll cover next.
Company culture is much more important than investors realize. When you see a strong company culture and great leadership, you will almost always find a company with long-term stock appreciation. It also works the other way around. When the company culture is strong and the leader is trusted, then employees will work more effectively; this leads to increased production.
According to Glassdoor.com, Dr Pepper employees have rated their employer a 2.7 of 5, which is below average. Only 43% of employees would recommend the company to a friend, and a paltry 44% of employees approve of CEO Larry D. Young. This is mostly attributed to a poor work/life balance.
Comparatively, Coca-Cola employees have rated their employer a 3.5 of 5, 69% of employees would recommend the company to a friend, and an impressive 86% of employees approve of CEO Muhtar Kent.
For Pepsi, employees have rated their employer a 3.3 of 5, 64% of employees would recommend the company to a friend, and 71% of employees approve of CEO Indra K. Nooyi.
Another important note is that if talented potential employees become aware of these comparisons, they will opt for Coca-Cola or Pepsi instead of Dr Pepper.
Dr Pepper launched its Rapid Continuous Improvement program in 2011. This had led to impressive cost savings and efficiency. For example, Dr Pepper closed 10 warehouses, and it cut its delivery fleet by more than 1 million miles. According to the shareholder letter, Dr Snapple closed its distribution gaps and increased its all-commodity volume, which will in turn put more products in more stores and increase shelf space.
Despite cost-cutting initiatives, Dr Pepper hasn’t strayed from returning its excess cash flow to shareholders. Buybacks are constant, and the company's dividend has increased five times since its IPO. Dr Pepper currently yields 3.30%, which is higher than Coca-Cola and Pepsi -- both of which yield 2.80%.
Dr Pepper seems to be making the right moves, and the company's stock has performed well since its inception. Revenue and profits have consistently improved annually, but top-line growth has slowed. Increased product diversification gives Dr Pepper the potential to refuel its growth, but aside from strength in Latin America, the company doesn’t have as much exposure to emerging markets where many consumers aren’t as health-conscious as Coca-Cola and Pepsi. Overall, Dr Pepper should make a decent investment going forward, but it’s simply not as strong as Coca-Cola or Pepsi.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!