Keurig Dr Pepper performs well but not my favorite

Keurig Dr Pepper is a leading producer and distributor of hot and cold beverages. It is the seventh-largest food and beverage company in the U.S. The company was formed in 2018 with the merger of Keurig Green Mountain and Dr Pepper Snapple Group.

Keurig has a wide range of more than 125 hot and cold beverage brands in its portfolio and operates a large sales and distribution network. Some of its popular brands include Green Mountain, Laughing Man, Barista Bros, The Original Donut Shop, Krispy Creme, Canada Dry, 7UP, Schweppes, etc.

KDP holds leadership positions in soft drinks, specialty coffee and tea, water, juice and juice drinks and mixers, and markets the #1 single-serve coffee brewing system in the U.S. and Canada. The company operates through four reporting segments: Coffee Systems (38% of 2019 sales), Packaged Beverages (44%), Beverage Concentrates (~13%), and Latin America Beverages (~5%).

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Revenue Growth & Market Exposure

Given, the long experience in the food and beverage industry, KDP keeps updating and modifying its product portfolio to meet the rapidly changing consumer preferences. It has a balanced portfolio of beverage options which also comprises zero, low and mid-calorie beverage brands.

KDP is in a good position to benefit from powerful partnerships with key industry players. It partnered with Nestle USA to manufacture Starbucks branded K-Cup pods in the U.S. and Canada, and with McCafe to license and deliver packaged coffee in the U.S. last year. Walmart, Costco, OXXO, PepsiCo affiliated and Coca-Cola affiliated bottler systems are KDP’s largest customers. The company also partners with other leading coffee, tea, and beverage brand companies like Starbucks, Kirkland Signature, Dunkin’ Donuts, Great Value, Kroger, Krispy Kreme, etc. through multi-year licensing and manufacturing agreements. Its agreements with PepsiCo and Coca-Cola also have an initial period of 20 years with automatic 20-year renewal periods.

Source: Company’s 2019 Annual Report

COVID-19 had a significant impact on the beverage industry during the last quarter. While stay-at-home orders negatively impacted sales of drinks at restaurants, consumers’ stocking-up behavior positively affected KDP’s e-commerce sales. The company also witnessed significant growth in brewers and K-Cup coffee pods for at-home consumption. E-commerce transactions registered healthy growth during the quarter. KDP incurred bad debt expense and inventory write-downs as a result of the pandemic. The volume/mix increase of more than 8% versus year-ago was driven by the strong and successful innovation introduced in the last year. For the full-year 2020, KDP expects net sales growth in the range of 3%-4%. The company’s revenues have grown at a rate of more than 18% CAGR in the last three years.

Dividends

Keurig Dr Pepper is a Dividend Starter and has paid a regular dividend of $0.15 per share every quarter. Though the company does not have an annual payout increase streak, it has been paying its dividends regularly. It sports an annual average yield of 2.6% and a payout ratio of 73%.

KDP continues to generate strong cash flows and reduce its debt load. The company generated strong free cash flow totaling $524 million in the second quarter. Its earnings are highly diversified by products, product categories, geographies, and markets.

The DPS Merger has brought together two iconic companies resulting in a strong business and creating one of the leading integrated brand owners and distributors of non-alcoholic beverages. KDP achieved merger synergies in excess of its $200 million target and EPS growth above the merger target of 15%–17% in the last year. It also reduced its bank debt by $1.3 billion during the same period.

The company anticipates FY2020 adjusted diluted EPS growth in the range of 13%-15%, or $1.38 to $1.40 per diluted share. It expects to benefit from strong cost management, productivity programs, and merger synergies in the future.

Competition

The beverage industry is highly competitive and continues to evolve in response to changing consumer preferences. KDP competes with large multinational corporations, smaller bottlers and distributors, and a variety of regional, and private label manufacturers. Coca-Cola, Kraft Heinz, Nestle, Pepsico, and J.M. Smucker Company are its primary competitors.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:KOKOCoca-ColaConsumer DefensiveBeverages - Non-Alcoholic0.6450.45216.7023.7323.732.130.03253.250.770041.640.078068Consumable - DiscretionaryNOYESYESYESUSA1
NASDAQ:PEPPEPPepsi CoConsumer DefensiveBeverages - Non-Alcoholic0.66131.47182.0426.8626.864.900.03113.110.834744.090.109976Consumable - DiscretionaryNOYESYESNOUSA1
NYSE:KDPKDPKeurig Dr Pepper IncConsumer DefensiveBeverages - Non-Alcoholic0.3828.0539.4734.2234.220.820.02142.140.731740.60-0.322133Consumable - DiscretionaryNONONONOUSA1

Bottom Line

Keurig Dr Pepper is well-positioned to offer a stable dividend. The merger has proven to be successful so far and the company is enjoying significant operational savings besides a more diversified product portfolio. Though the company is smaller in size when compared to the likes of Coca-Cola and Pepsico, it offers a competitive product lineup and healthy dividends.

Dividend Adjusted Charting by StockRover.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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