Keurig-Dr. Pepper Is A Solid Play On Beverages
Those looking for a value won’t find it in Keurig-Dr. Pepper (NYSE: KDP) but that doesn’t make it a bad purchase. The company is trading at roughly 22X its earnings compared to about 15X for the broad market which makes it quite an expensive stock for the 2.0% dividend yield that it pays. What these numbers don’t reveal is the health of the underlying beverage segment which is revealed in results from this company as well as from The Coca-Cola Company (NYSE: KO) and Pepsico (NASDAQ: PEP). The stock may look like a value compared to these peers with them trading at roughly 26.5X earnings but there is a reason for this as well. As attractive as the dividend is, both Pepsico and Coca-Cola are paying higher yields near 2.7%, and have a more stable history of dividend increases, which accounts for the difference.
The takeaway is that Keurig-Dr. Pepper is a solid dividend payer and on track to raise the dividend within the next few quarters. The company is only paying out 47% of its TTM earnings and the balance sheet is sound. The company produced $599 million in FCF cash flow in the 2nd quarter of 2022 which puts the FCF payout ratio closer to 44% on an as-reported basis and leaves ample room for buybacks and dividend increases. As for buybacks, the company repurchased 2.5 million shares for $87.6 million during the quarter and still has $3.9 billion left under the current authorization which is worth about 7.5% of the current market cap.
Keurig-Dr. Pepper Produces Real Growth
Keurig-Dr. Pepper had a mixed quarter in terms of the analyst consensus but a good quarter in nearly every other way. The company served up $3.55 billion in revenue for a gain of 13.2% over last year beating the analyst consensus by 500 basis points. The strength was driven by both pricing and volume with pricing up 10.4% and volume up 3.1%. On a segment basis, the core Liquid Refreshment Beverages grew by 9.9% while the Coffee segment grew 3.8% and the Coffee Systems segment by 9%.
The mixed part of the report is the margin which came under pressure due to one-off items, increased costs, and supply chain disruptions. The GAAP operating income fell by 22.1% because of the pressures, shaving 51% off the GAAP earnings, but the adjusted results are much better. The adjusted earnings, which only include the impacts of inflation, came in as expected at $0.39 and are up 2.6% versus last year on efforts to mitigate inflation.
Turning to the guidance, the company is expecting to raise prices again in the second half and that should drive both top and bottom line results. The bad news is that inflationary pressures are also rising so, while revenue guidance was raised, the earnings guidance was maintained at the prior level. The takeaway, however, is that earnings and cash flow still support the dividend growth outlook.
The Technical Outlook: Keurig-Dr. Pepper Reverses Within A Range
The price action in Keurig-Dr. Pepper is in a long-term uptrend but has been range bound for the last few quarters. The post-release action has the stock up slightly but above the mid-point of the range where it may trend higher. Assuming support is confirmed at the mid-point of the range, the stock could move up to the $39 level by the start of the 4th quarter and possibly move higher from there if the economic and earnings outlook is still positive. 
