Taking Stock: Is Dr Pepper stock peppy?

Dear Mr. Berko: In January 2009, I bought 200 Dr Pepper shares at $29. My kids drink Mott's and Hawaiian Punch by the case, so my husband thinks I should buy 100 more shares for my IRA. Our broker is neutral and knows better than to disagree with my husband's recommendations. Actually, I am thinking of selling the stock and taking a profit. Please give me your thoughts.

L.G., Durham, N.C.

Dear L.G.: Dr Pepper Snapple Group (DPS-$39.96) came to life as a public company in May 2009 following the spinoff of Cadbury Schweppes American Beverages unit from Cadbury Schweppes PLC. DPS began trading on the NYSE at $25, quickly rose to $28 and nine months later crumbled to $12. So if you're hooked on Snapple, Canada Dry, 7Up, A&W Root Beer, IBC sodas, Squirt, Crush, Sunkist soda, RC Cola (with a MoonPie), Vernors and Diet Rite, then Dr Pepper has the right prescription for you. And if you also relish the wonderful sugary flavors of Snapple, Mott's, Hawaiian Punch, Yoo-Hoo, Country Time, Rose's and Margaritaville brand names, then stand in line behind millions of other consumers who bought $5.7 billion of DPS's savory, sugar-rich sodas that will clog your arteries like summer mud.

Revenues have been tepid to flat in the past couple of years, though earnings increased modestly while the $1 dividend was recently raised from 90 cents to yield 2.5 percent. Management has improved net profit margins nicely, and continued improvement from 9.4 percent to an expected 11.3 percent by 2014 may grow earnings faster then revenues.

However, while I worship the menu of ambrosial nectars, I think DPS at 14 times earnings may be fully priced. DPS depends on third-party bottlers for 55 percent of revenues, and the company lacks the scale of its larger peers to grow U.S. revenues or profit meaningfully from international distribution. Therefore, I see little meaningful future growth in the coming years and few reasons to buy the stock at $40.

Another negative is its lack of participation in the important but very fast-growing business of energy drinks, sports drinks and enhanced water beverages. Management gave it a go in late 2008, launching a sports drink named Accelerade, but it was a heralded business disaster.

Nearly 90 percent of DPS's revenues derive from the U.S., where carbonated drink revenues were down 2.1 percent last year due to the health concerns for high-sugar-content drinks. So some DPS observers believe this negative publicity could dampen revenue growth.

I would really, really like to be bullish on the stock. I drink Yoo-Hoo by the pallet, my pantry is chock full of Snapple and I have been an A&W aficionado (with vanilla ice cream) since my days in knickers. But considering the extremely high level of stock ownership by management, DPS's wise use of the $900 million it received from PepsiCo and its firm economic moat protected by very popular brands, I would be a buyer on a pull back to the $32-$33 level. At the $32-$33 entry level, I'm comfortable with a potential 6 percent to 7 percent total return over the next five years.

Frankly, I'd sell the 200 shares you bought last January at $20 and take a 10-point profit. Park the proceeds in a no-load floating rate fund like Fidelity's FFRHX that yields 3.2 percent and wait for an attractive re-entry point in the low $30s.

Please address your financial to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com. COPYRIGHT 2011 CREATORS.COM

Published: Thu, Jun 30, 2011

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