Wednesday, 12 February 2014

Dr Pepper Snapple: what's the worst that could happen?

Back in October I posted for the first time on Dr Pepper Snapple and concluded that:

'At c. 7% free cash flow yield and x10s EV/ebit for this year, you could do worse on the branded consumer products side, despite the continued bad press around sodas at the moment'

Since October the share has done well and earlier today traded at all-time highs just above US$51. 

The potential I saw for solid performance back in October has broadly continued.  Q4 (as with the FY period) saw positive price-mix but negative volumes...

...and the overall flattish full year net sales and segment operating profit line did not hold back some modest EPS progression, helped by the continued share buy back.

What did improve was cash flow with free cash flow improved to US$687m in FY13 from only US$285m.  This is equivalent to a 7% free cash flow yield.  Importantly though, Dr Pepper Snapple paid out all this cash flow in dividends and buy backs.  As noted above, this is an attractive statistic for most investors.

Full year guidance is for a continuation of many of the above trends (low/no sales uplift, continued material share buybacks).  The mid-range EPS progression anticipated for FY14 is 6.9%. 

Overall with a 7% free cash flow yield (all returned to shareholders) and x11s prospective EV/ebit, investors can live with this valuation for the company.  To ape the Dr Pepper advertising, prospects for the company's shares can be summarised as 'what's the worst that could happen?'.  Remains a core holding and technically interesting to see if it can make new highs.  On generalised market weakness in the US$47s I would buy more. 

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