The Beverage Industry Gets a Little Smaller
On this episode of Market Foolery, Chris Hill talks with Stock Advisor Canada's Taylor Muckerman and Million Dollar Portfolio's Jason Moser about the biggest stories in the market today. Dr Pepper Snapple (NYSE: DPS) and Keurig Green Mountain are tying the knot, and Dr Pepper Snapple shareholders will get an unusually exciting package if they stick with the new company.
Consumer spending was up big in December -- but the consumer savings rate was the lowest it's been in over a decade, and U.S. debt levels across the board are enormous. College students -- interested in $10,000? Listen in to find out more about our new Motley Fool College Student Award, or visit fool.com/competition.
A full transcript follows the video.
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This video was recorded on Jan. 29, 2018.
Chris Hill: It's Monday, Jan. 29. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today: from Stock Advisor Canada, Taylor Muckerman, and from Million Dollar Portfolio, Jason Moser. Happy Monday, gents! Happy merger Monday!
Taylor Muckerman: It's back. Full force.
Hill: It is back. We've got news, we've got some consumer data that's frankly a little depressing that we'll get into. Also have some excited news about Motley Fool College Student Awards, so stay tuned for that. But, we have to start with merger Monday. Dr Pepper Snapple is merging with Keurig Green Mountain. That's why, if you're a Dr Pepper Snapple shareholder, you're having a good day. Shares up. This is an interesting deal for a lot of reasons. Not just the on the surface one of, it's a beverage company, but now it's the cold, I don't want to say dessert beverages, but the soft drinks and the coffee behemoth. There are a bunch of threads here. Where do you want to start, Jason?
Jason Moser: There are a lot of threads. I think the Mondelez angle, right, all of the sudden becomes a little bit more like a PepsiCo snack company. A lot of different ways to look at this. To me, I think it's a fascinating merger in that it brings together two brands that consumers are pretty familiar with on their own. Yet, really, what these brands do probably better than anything else is partner up with really popular, successful brands to beget more success. And when you look at Dr Pepper Snapple and you think about Coca-Cola, PepsiCo, and Dr Pepper Snapple is kind of that third. And not in a bad way. It's a good company; it's just smaller.
Muckerman: It's almost 9% market share in the soda market.
Moser: Yeah, exactly. I think the neat thing that Dr Pepper Snapple has been able to do over the past several years is, in 2010, they had the wherewithal to sign some pretty important licensing deals with both Coca-Cola and PepsiCo. So while they depend on the brands they own for success, they're also not only competing with Coke and Pepsi, but partnering with Coke and Pepsi as well. So these were 20-year deals each, with the automatic renewal after 20 years for another 20 years unless they wanted to renegotiate the deals. But ultimately, what it does is shines a light on the big advantage in this business, which really is scale and distribution, having the global ability to push this stuff out to audiences everywhere. And not only competing with Coke and Pepsi, but also partnering with them, as those two behemoths license some of those properties from Dr Pepper Snapple. So, to me, yeah, there are a million different angles. We could probably talk about this deal for an hour.
Hill: Let's not.
Moser: But, that's my initial take on it.
Muckerman: We have some awards to hand out, so we'll hold off on that. But yeah, very interesting. I've seen a lot of people touting the combination of Keurig Green Mountain's access to e-commerce, a little bit more so than what Dr Pepper Snapple brings to the table. They have that traditional beverage distribution network. So maybe combining those gives them a little bit more of an advantage, diversifying how they get their products to consumers. And this is just JAB, the parent company of Keurig Green Mountain, continuing its quest to chase down Nestle as the top food company in the world by sales, and maybe trying to push the news of Panera recalling their cream cheese for potential listeria contamination off the news.
Hill: I saw that, and my first thought was, Ron Shaich is so happy that Panera is a private company.
Moser: Yeah, precisely. That's a great point there. I was thinking about that this morning when I read that news as well.
Hill: Yeah, because if you see that news and Panera is a public company, Dr Pepper Snapple merging with Keurig is probably our second story, and our lead story is, "Shares of Panera down 8% on ... " I want to go back to Coke and Pepsi for a second because they are the behemoths in this space. Both shares down a little bit today. How worried are they, do you think, about this? I realize they're all in the beverage business together, but I look at this and I can't see Coke and Pepsi losing too much sleep over this.
Muckerman: I don't think so either. I think they're probably just down because the market is down a little bit this morning. And Coke has some familiarity with Keurig Green Mountain as, they weren't full owners, but they had a close to 20% stake in that company at one point before they sold to JAB. So they're familiar, they know that business, and they probably know some of the threats and competitive strengths that they're going to have to watch out for. So, I don't think they're all too worried. Although, you are watching the No. 3 in the market make a move.
Moser: Yeah, I think Pepsi is probably less worried -- I don't know if "worried" is the right word, but less focused on this, as opposed to Coke. This makes Dr Pepper Snapple a little bit more like Pepsi, and that's primarily because of the Mondelez interest here. It gives potentially a new dynamic in snacks and whatnot with JAB and Mondelez owning the majority of this company. So it helps Dr Pepper Snapple diversify not only globally, but also its product line, and I think that's ultimately a good thing. But, again, I think Taylor is right, Coca-Cola and Pepsi-Cola are probably not all that worried about it. I think the mechanics of the deal are interesting on their own, because I think if you read through the headline, you kind of wonder what in the world is going on. This offer was made, and now shares of Dr Pepper Snapple are up $118, but they're only getting $103.75 in this special cash dividend. So, essentially, what's going to happen is, one share of Dr Pepper Snapple, shareholders are going to get $103.75 as the special dividend, and then they'll also get one share of the newly formed entity, Keurig Dr Pepper. So there will be that publicly traded company, after all of this is said and done, that you can still participate in.
Muckerman: Yeah, they're not losing the upside of the deal entirely.
Moser: Right. And given the expertise, bringing on JAB, those guys obviously know what they're doing. I think there's still reason here for shareholders of Dr Pepper Snapple today to think, "Maybe I want to hang on to these shares for a while and see how these guys shake out."
Muckerman: For sure, yeah.
Hill: I feel a little bit bad for Snapple, because if I'm reading this correctly, and maybe I'm wrong, but I got the sense that Snapple is being dropped from the formal line of the company. That the formal name of the company is going to be Dr Pepper Keurig.
Moser: "Dr Pepper, Keurig, and other things."
Muckerman: "That's all."
Hill: Dr Pepper got divorced and is now married to Keurig.
Moser: Well, I think the solution here is clear. They just need to throw blockchain in the name and be done with it.
Muckerman: It worked for Long Island Iced Tea, for a short time.
Hill: Lowe's (NYSE: LOW) is ramping up its share buyback program. Lowe's has an existing $2.1 billion share buyback plan. The home improvement company just announced a new $5 billion plan on top of this one. Am I wrong in thinking this is going to be the narrative for this earnings season, which really kicks into high gear this week, just the idea that, on top of everything else, we're going to see more companies starting either new share buyback plans, or ramping up existing ones?
Muckerman: Yeah, I think you have tax reform to thank in large part for that. Home Depot (NYSE: HD) announced $15 billion in buybacks. And you look at their next three years projection, they're going to spend about $8 billion on capex, and $27 billion on dividends and buybacks. So, a little bit different story there from the narrative that was being told to folks with tax reform that wages were going to go up, spending was going to increase. I think investors are going to be the largest beneficiary from buybacks and dividend increases, although we're at an all-time high here in the market, so interesting to see buybacks be the choice for these companies, especially to the tune of $5 billion for Lowe's and $15 billion for Home Depot, among many other companies announcing similar stories.
Hill: That's what makes it a little bit tricky, doesn't it, Jason? There are companies out there that have a tremendous track record in share buybacks. But against the backdrop of the market being as high as it is, and a lot of these stocks being as high as they are, even though they don't have to buy them at the absolute peak, it's still not as great as when you see a company with a great track record, and maybe they've hit a couple of speed bumps, their stock is down 20% and then they come in and say, "You know what? We know best what's happening at our company, and our stock is on sale and we're buying it at a lower price."
Moser: Yeah, the burden of truth certainly becomes greater. I think if you look historically from 2013, Lowe's share count is down almost 25%. The stock has done very well. So, it's hard to make the argument that shareholders haven't won on the backdrop of share repurchases over that stretch. I think Lowe's and Home Depot are two businesses in somewhat unique positions in that they're gaining credence as fairly Amazon-resistant businesses, in a world where Amazon is pretty much eating everything in the retail world. So there is something to consider, at least when you look at businesses like Lowe's and Home Depot. Again, this is an authorization, so it doesn't mean they're automatically going to start buying back shares.
But understand the impact of these share repurchases. If you look at the annualized growth rates over the last five years for Lowe's, revenue has grown 6.2%. Net income has grown 12.3%. Earnings per share have grown at an annualized rate of 20%. Now, that is share buybacks in action right there. As long as they can continue to execute on the business side and buy shares back at a reasonable valuation, it's difficult to sit there and make the argument that they're doing a bad thing. But by the same token, we have a lot of data that tells us, on the whole, companies usually get this wrong, at least in the short-term.
Hill: I bet we're going to see it with Apple later this week.
Moser: My guess is you're right. I saw, they're already talking about how they're cutting iPhone X production because of lack of demand. That's not terribly surprising.
Muckerman: I don't think their speaker came out to great fanfare.
Moser: We have the battery issue here, I think a lot of people are not going to be upgrading and rather getting new a new battery. So, they're going to have to figure out some way to change that narrative. But, it's still Apple.
Hill: It is. Although, it will be interesting to see if, in fact, they do announce a buyback plan later this week as part of their earnings reports, it'll be interesting to see how high up the press release that comes. Because I think that's the reading the tea leaves. Because if --
Muckerman: If it's the lead ...
Hill: Yeah, if it's the lead, it's like, "Ooh, boy, they might actually be in legitimate trouble." If it's somewhere like fourth or fifth, it's like, "Oh, OK." And if it's dead last, you're like, "Oh, they're just hitting a speed bump, they're fine."
Consumer spending data is out for December, and I guess we shouldn't be surprised. Consumer spending rising in December leading into the holidays. Not a surprise. What's a little bit of a surprise, and definitely a disappointment, the savings rate hitting a 12-year low, Jason. Come on, America!
Moser: Womp-womp.
Hill: This is why we can't have nice things.
Muckerman: Or it's why you have too many nice things.
Moser: Exactly, that's the problem. It's unfortunately not very surprising. Terribly disappointing. There's a lot to unpack here. I was thinking about this earlier when I was reading this, and the cognitive dissonance there. You want to get rich yet shun accumulating wealth. Everybody wants to be rich, but they don't want to do the hard work of actually getting there. If it was easy, everybody would be doing it. I'm not saying it's easy. But it's certainly something that you need to think about.
We've talked about this data before. When we look at saving, I think employment is generally the easiest way to go through with this and utilizing a 401(K) or something like that. If you don't have a 401(K), you need to setup your own IRA, and have part of your paycheck automatically go in that. According to U.S. Census data, 79% of American workers have the option to take advantage of funding a 401(K), but only 41% of us actually choose to participate. And that's obviously not good. Encouraging, I think, is that more companies are actually automatically signing employees up and forcing you to go in there and opt out. Then maybe you can take a second look at, is this really the decision I need to be making? I mean, it's also worth wondering, if the savings rate is this low, have we hit a ceiling on consumer spending? Because it seems like a lot of people are spending money that they either saved or on credit.
Muckerman: Definitely on credit.
Moser: Probably not a whole heck of a lot left to be spent. So, all in all, not so great.
Muckerman: Yeah, I saw some pretty startling numbers the other day, looking at overall debt levels across student loans. Almost $1.5 trillion. Auto loans, $1.3 trillion. Mortgage debt, $10 trillion. Total household debt, $13.5 trillion. A very interesting chart I saw the other week, credit card debt growth over an annualized period, moderating around 7.5% per year from mid-2016 to mid-2017, and then ratcheted up to above 20% annualized growth in credit card debt toward the end of 2017. So it was off the charts compared to the last five to six years annualized growth. Very worrisome, especially when coupled with -- I didn't see the savings rate until you guys mentioned that this morning, but over a decade low in savings rate.
Hill: I love that companies are starting to force new employees to opt out of their 401(K) plan.
Muckerman: It's a good nudge.
Hill: It's a good nudge, and it gives you the option, but it just switches the option. So for anyone who says, "That's a little Big Brother-ish, it's my paycheck, don't tell me what to do," it's like, you can do it. But we're just switching the situation, where it's like, you can absolutely have it, but you have to proactively want it. And what would be amazing is if major employers started to tout this. Like a Wal-Mart, which has hundreds of thousands of salaried employees -- and maybe they already do that, I just picked the biggest employer in the United States, but that would be great, if some of those really large companies could start to just come out and say that. "Oh, by the way, here's our little part of trying to fix this."
Moser: Yeah, I feel like they could change the conversation. The Big Brother aspect, that sort of perspective, I do understand that. I think, really, what it really is focused on is exploiting two very predominant human qualities in ignorance and laziness. And I'm not saying that to be facetious. I'm not kidding around. Generally speaking, people are lazy when it comes to doing this kind of stuff. "Well, I'll do it later." They procrastinate and never do it.
Hill: It's paperwork.
Moser: Yeah, exactly. And ignorance, and not actually understanding what it all means and how it works. And that's obviously why we have a job, and what we try to do in helping to educate folks like this. So, I do like that, forcing you to opt out vs. making you opt in. I think, forcing you to opt out at least makes you take that step of educating yourself somewhat. And if you can actually take a look at that for a second and realize what exactly is going on, then you realize, "Woah, maybe I shouldn't do it."
Muckerman: And maybe if the companies that match say, "You're opting out of free money or basically a pay raise, because we're going to match whatever you put in there by a few percent," you're basically throwing money away right off the bat.
Hill: Let's wrap up on a fun note. Let's give away some money. How about that?
Muckerman: OK.
Moser: I like that.
Hill: Even better, it's not our money.
Moser: Even better!
Hill: It's the company's money.
Muckerman: It's to college kids, right?
Hill: Yes. It's the Motley Fool $10,000 College Student Award. This is open to all people over the age of 18 who are attending college. Fool.com/competition. The first-place winner gets $10,000. There are 20 runners-up that can win $1,000 each. To enter, all you need to do is write a 500- to 1,000-word article on one of the prompts listed. It's a writing contest. And it ends April 30 of this year, so you have some time. Again, 500- to 1,000-word article. And I'll just tell you right now, to anyone who's listening who's in college and thinking, "I'm going to enter this contest," you want to, if nothing else, hit that range, because our editors are sticklers. If it's 499 words, or 1,003 words, it's going to get dinged. Hit that 500- to 1,000-word range. Terms and conditions apply. This is the lawyers making me say this. Terms and conditions apply. Please visit fool.com/competition for more details. So there you go.
Muckerman: That's awesome.
Hill: It is awesome. It's fun, I like that we're doing it. Again, the most important thing is, it's the company's money we're giving away, not ours. Jason Moser, Taylor Muckerman, thanks for being here, guys!
Muckerman: Cheers!
Moser: Thank you!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Jason Moser owns shares of Apple. Taylor Muckerman owns shares of Amazon and Home Depot. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short May 2018 $175 calls on Home Depot, and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.
