Don’t Expect Merger to Invigorate Dr Pepper Snapple Stock
Dr Pepper Snapple (NYSE:DPS) has become unusual among its peers for one reason — growth. In an environment where consumers increasingly avoid sugary beverages, DPS stock has maintained a growth trajectory.
Now, the company begins anew as Keurig Dr Pepper beginning on Jul. 10. This will leave many wondering how the merger will affect the Dr Pepper Snapple growth story. Still, with the merger priced into DPS stock, investors should probably temper their expectations.
DPS Stock Has Performed Better Than Its peers
To be sure, the beverage industry faces challenges. With all the consciousness about health and the warnings related to both sugar and sugar substitutes, consumers increasingly avoid these drinks.
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Moreover, Coca-Cola (NYSE:KO) has little room to expand. PepsiCo (NASDAQ:PEP) has suffered years of declining revenues and profits. So, the only company in this category that outperforms DPS is Monster Beverage (NASDAQ:MNST). However, with its energy drinks, one could argue it exists in a class by itself.
Now, these companies will compete with the new Keurig Dr. Pepper, which will trade on the New York Stock Exchange under the symbol “KDP.” This will become the third-largest nonalcoholic beverage company in the country. It will also stand as the seventh-largest company in the food and beverage industry.
With its larger size and orientation less focused on soft drinks, the new KDP stock should stand out as the stock of choice in the nonalcoholic beverage industry. However, this does not mean investors should buy into this industry or KDP stock.
Performance Expectations Have Remained Muted
Back in March, our own Luke Lango said that the market should value DPS stock at between $120 and $130 per share. Mr. Lango appears to have made the correct call. Today, DPS trades at about $122 per share.
Even then, he described Dr Pepper Snapple as an “unexciting investment opportunity.” Most of this year’s growth in DPS stock came in January when DPS announced that it would merge with Keurig Green Mountain, Inc.
It remains unclear whether DPS stock becoming KDP stock will make the company any more exciting. DPS’s five-year average price-to-earnings (P/E) ratio stands at 20.34. At its current price and estimated net income, the stock trades at about 23.75 times forward earnings.
Investors Will Weigh Options After DPS Stock Special Dividend
However, this P/E may not remain meaningful under the new KDP stock, especially since owners of DPS stock will hold a relatively small share of the new company. Those who hold DPS stock will receive 13% of the company, with Keurig shareholders getting the remaining 87%. Holders of DPS stock will also receive a special dividend of $103.75 per share.
Such a payout will leave many investors with fresh cash in need of investment. Many choices exist. Given the uncertainty surrounding the new company and the lackluster numbers coming from the beverage industry, both dividend recipients and new investors should probably look at different investment options.
Final Thoughts on DPS Stock
With post-merger uncertainty and the struggles of the beverage industry in general, investors should not expect huge gains to come from this merger. DPS stock has become one of the better performers in a slow-growth industry. However, with the new KDP, investors have little information to act on other than a vague expectation for growth.
The new KDP stock could go on to outperform its peers. Still, with beverage companies battling to achieve any growth at all, surpassing industry averages will not necessarily translate into high growth.
Current DPS stock investors will now receive $103.75 in cash for every share owned. Until we know more about the culture, sales and performance of the new Keurig Dr Pepper, dividend recipients should probably invest their cash elsewhere.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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