Dr Pepper Snapple: 3.2% Dividend Yield, and in a Recession-Resistant Sector

Dr Pepper Snapple Group’s (DPS) sales are nowhere near those of its soft-drink industry rivals Coca-Cola (KO) and PepsiCo (PEP). But even though the beverage maker came relatively late to the dividend party, (after its 2008 spinoff by Cadbury) its yield now has more pop than offered by either of those giants.

For dividend investors who may be starting to think about playing defense because of economic fears, Dr Pepper offers a reasonable dividend play, in a consumer-staples sector that rides out financial turbulence better than most.

DPS Dividend Yield Chart

DPS Dividend Yield data by YCharts

As a distant number three, Dr Pepper can’t muster the economies of scale that help profits at Coke and Pepsi, it can’t as easily muscle its suppliers for rock-bottom prices, and it has only a modest presence in the high-growth overseas markets that are fueling Coke and Pepsi’s expansion. On the other, its portfolio of brands – Dr Pepper, 7-Up, A&W root beer and the Snapple line of tea products – continues to turn in a solid performance.

Management’s recent distribution system changes have helped profit margin a bit, and there’s undoubtedly more room for additional efficiencies.

DPS Profit Margin Chart

DPS Profit Margin data by YCharts

Dr Pepper’s margins aren’t as lush as Coke’s, but hey, as dividend investors we’re more interested in whether the company can keep covering its payout. And in that respect, (if we overlook a non-recurring payment that hit cash flow in the latest quarter) things keep trending up. When Moody’s bumped Dr Pepper’s rating up a notch last year to Baa1, it noted the company has significantly lowered it leverage since the spinoff, but grumbled a bit about introduction of the dividend.

DPS Free Cash Flow Chart

DPS Free Cash Flow data by YCharts

Let the rating guys grumble. Dr Pepper ‘s financial momentum is improving, its dividend is more than reasonable and well covered, and the stock promises to weather any financial storm that comes along.

Of course, whenever we buy a stock for its dividend income, we’re purchasing the underlying stock. So before committing to any dividend play, it just makes sense to check out its fundamentals (YCharts can help you with that) and to read the company’s latest 10-K.

James P. Miller is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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