Who Knew Dr Pepper Snapple Group Inc. (DPS)’s Returns Were This High?

Dr Pepper Snapple Group Inc. (NYSE:DPS) currently has a 2.5% dividend yield and a payout ratio of 48%.  The company’s payout ratio has hovered between 40% and 50% for much of its corporate life.

With large dividends and share repurchases, Dr. Pepper Snapple Group returns virtually all of its earnings to shareholders.  The image below shows the amount of cash returned to shareholders from 2011 through 2014:

Investors in Dr. Pepper Snapple Group can expect solid total returns going forward.  With expected earnings-per-share growth of 7% to 11% a year and a dividend yield of 2.5%, shareholders can expect total returns of 9.5% to 13.5% a year from Dr. Pepper Snapple Group.

Not bad for a ‘boring’ soda company.

Unfortunately, other investors have noticed that Dr. Pepper Snapple Group is a high quality business.

Dr. Pepper Snapple Group is currently trading for 20.1 times expected 2015 earnings.  The company is certainly not a value play.  Click here to see 11 undervalued blue-chips.

With that said, Dr. Pepper Snapple Group is likely trading around fair value for a high quality shareholder friendly business with a strong brand based competitive advantage.

Final Thoughts

Dr. Pepper Snapple Group is a shareholder friendly business with a strong portfolio of high quality brands.

The company operates in a slow-changing industry.  It is virtually impossible that consumers in North America stop drinking single-serve and fountain beverages.

It is very difficult to conceive of any technological changes that could ruin Dr. Pepper Snapple Group (unlike businesses in faster changing industries).

These characteristics make Dr. Pepper Snapple a suitable investment for dividend growth investors.  The company does not have a long dividend history due to its spin-off from Cadbury Plc.  With that said, many of the company’s individual brands do have a long history.

Dr. Pepper Snapple Group also performed well during the Great Recession of 2007 to 2009.  The company saw earnings-per-share grow each year through the Great Recession.  Click here to see the 10 most recession proof Dividend Aristocrats.

Dr. Pepper Snapple scores high marks for safety due to its presence in a slow changing industry, recession performance, and strong brands.

The company appears to be trading at fair value and offers investors above-average total returns.  Finally, the company’s management is shareholder friendly as well.

Disclosure: None