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Keurig Dr Pepper (KDP) Cheers Investors With Dividend Hike

Keurig Dr Pepper KDP announced that its board of directors approved a quarterly cash dividend hike of 6.7%. The quarterly dividend will be paid out on Oct 14, 2022, to shareholders of record at the close of the business on Sep 30, 2022. This brings the new annualized dividend to 80 cents per share, resulting in a dividend yield of 2.5%.

The dividend increase is likely to be a relief for investors, as the company raised concerns about significant input cost inflation, rising transportation costs and supply-chain disruptions, which are likely to persist in the near term. These, along with the adverse impacts of higher marketing investment, dented the margins.

In second-quarter 2022, the adjusted gross margin contracted 180 basis points (bps) year over year to 54.7%. This was mainly due to higher transportation, warehousing and retail labor costs. The adjusted operating margin contracted 330 bps to 23.4%.

However, the ongoing recovery in the supply chain of coffee and non-carbonated beverages, as well as robust pricing actions, bode well for KDP. It has been gaining from solid portfolio demand and strong market share gains.

As a result, retail dollar consumption increased 9.9% and market share expansion rose above 92% of KDP's cold beverage portfolio in second-quarter 2022. This mainly reflected strength in CSDs3, premium unflavored water, coconut water, seltzers, teas, apple juice, vegetable juice and fruit drinks. Strength in Dr Pepper, Sunkist, Canada Dry, A&W and Squirt CSDs, CORE Hydration, Vita Coco, Polar seltzers, Snapple, Hawaiian Punch, and Mott's aided the quarterly results.

Strength across the Packaged Beverages segment serves as a key growth driver, backed by growth in CSDs, CORE Hydration, Snapple, Polar seltzers, Vita Coco, Mott's and Hawaiian Punch. The segment witnessed sales growth of 12.8% in the second quarter, gaining from a favorable volume/mix of 1.9% and a higher net price realization of 11%.

In coffee, retail dollar consumption of single-serve pods manufactured by Keurig Dr Pepper rose 3.8% in channels tracked by Iri, driven by improved pricing in partner and KDP-owned and licensed brands. KDP’s coffee systems sales increased 9%, owing to the company’s completion of the coffee recovery program.

Driven by the above-mentioned factors, management raised its 2022 sales view. It projects net sales (cc) to grow in the low-double-digit range compared with the earlier stated high-single-digit increase. Adjusted earnings per share are envisioned to grow in the mid-single digits for 2022. Adjusted earnings per share growth are expected to be in the high-single digits for the second half of 2022.

We note that shares of this Zacks Rank #3 (Hold) company have gained 9.8% in the past three months compared with the industry’s growth of 7.4%.


Zacks Investment Research
Zacks Investment Research

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Coming to the latest news, the company has a dividend payout ratio of 58.3%. KDP’s ability to reward shareholders with dividends and buybacks is backed by a strong cash flow and revenue-generation capacity. The company’s annualized cash flow growth rate has been 22.5% over the past 3-5 years versus the industry average of 7.6%.

All said, Keurig Dr Pepper’s impressive fundamentals, strong footing in the industry and solid portfolio make it a promising stock.

Stocks to Consider

We highlighted some better-ranked stocks from the broader Consumer Staples space, namely Chef Warehouse CHEF, Campbell Soup CPB and General Mills GIS.

Chef’s Warehouse, a distributor of specialty food products in the United States, currently flaunts a Zacks Rank #1 (Strong Buy). CHEF has a trailing four-quarter earnings surprise of 372.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Chef Warehouse’s current financial-year sales and earnings per share suggests growth of 38.1% and 2,820%, respectively, from the year-ago reported numbers.

Campbell Soup, the manufacturer and marketer of high-quality, branded convenience food products, currently carries a Zacks Rank #2 (Buy). It has an expected long-term earnings growth rate of 1.6%.

The Zacks Consensus Estimate for Campbell Soup’s current financial-year sales and earnings per share suggests growth of 10.1% and 15.4%, respectively, from the year-ago reported numbers. CPB has a trailing two-quarter earnings surprise of 10.8%, on average.

General Mills, which manufactures and markets branded consumer foods worldwide, currently carries a Zacks Rank of 2. GIS has a trailing four-quarter earnings surprise of 6.5%, on average.

The Zacks Consensus Estimate for General Mills’ current financial year’s sales and EPS suggests growth of 2% and 1.5%, respectively, from the year-ago reported figures.

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