Have I mentioned Dr. Pepper Snapple Group (
) on this blog before? OK, once or twice. There wouldn't be a need
for this crusade if anyone else seemed to be paying attention.
Honestly, it seems like Crocs (
), a maker of plastic shoes, gets more press.
Despite relative obscurity, DPS is a serial winner. The stock was
up 11% Wednesday, thanks to a combination of earnings and the
)/Coca-Cola Enterprises (
And yet, it's still cheap.
Dr. Pepper hit the jackpot when Pepsi bought its largest bottlers
([[PBG]] and [[PAS]]). The deal triggered a change of control
clause in DPS' bottling agreements with those companies. As a
result, Dr. Pepper renegotiated the deals and extracted $900
million from their new parent Pepsico (
). Dr. Pepper was also able to reclaim some brands for their
internal bottling operations.
On Wednesday's earnings call, DPS management said they expect to
close the deal by the end of February. So, like, tomorrow!
That's $900 million... cash... tomorrow.
Dr. Pepper has approximately 256 million shares outstanding. At $32
a share, the current market value is just $8 billion. So the $900
million payment (did I mention that already?) is pretty significant
in both absolute and relative terms.
What does DPS plan to do with the money? Debt repayments, share
repurchases, and dividends. (Is that a song?)
On top of this windfall, Dr. Pepper Snapple generated operating
cash of $865 million in 2009. Of this, $312 million was spent on
capital expenditures, approximately half of which were new
investments (as opposed to maintenance capex). The remaining cash
flow was spent on voluntary debt prepayments of $550 million.
How's that for straightforward capital allocation? (550 + 312 =
862) Not a coincidence.
At year-end 2009, Dr Pepper Snapple had $2.955 billion of debt
outstanding. The company's target debt level is approximately $2.5
billion. So with the Pepsi payment, the company will immediately
reach its debt target and have $400 - $500 million cash remaining.
As in, like, tomorrow.
It is not surprising then that the company announced an increase in
its share repurchase plan to $1 billion. Only 3 months ago, DPS
announced its first ever buyback plan ($200 million) and its first
dividend (15 cents a quarter). So in just 3 months since the first
buyback announcement, the board became so confident in the
company's cash generation that it increased the authorization by
$800 million?!? Astounding.
Far from a publicity stunt, management announced that the
repurchases will begin once the debt target has been met. Again, so
like, tomorrow! OK, Monday.
The excess Pepsi money ($400 - $500 million) will probably be
allocated to share repurchases immediately. The same is probably
true for all excess cash flow going forward. In short, cash
previously dedicated to debt payments will now go towards share
repurchases. This is not a bogus buyback (the norm) that simply
offsets stock option dilution. Rather, it is a concerted effort to
return cash to shareholders. Lots of it.
Most companies in this situation would find some reason to throw it
away on an expensive acquisition (here read Dell/Perot). But DPS
(as I've been saying over and over again) is not "most companies."
When asked about possible acquisitions on the conference call, one
company official (can't remember which one) put the issue to rest
seemingly forever. Our growth is going to be "organic, not from
M&A" (a pretty close paraphrase). He said that the company may
buy some small distributors, but that any such transaction would be
tiny. He may have even called it a "rounding error." Again,
straightforward... and shareholder friendly!
So here is how DPS' free cash flow will probably being allocated
into the near future:
- $700 million in free cash flow (a conservative 2010
- $150 million in discretionary capex
- $150 million in dividends
- $400+ million in share repurchases
The $700 million free cash flow estimate could be low as
interest expense will be dramatically lower going forward. The
company has lowered its average interest rate to around 5%. And
don't forget over $1 billion of debt repayments. That's as of,
The Pepsi money means that the current share repurchase plan could
be completed in just 12 months. But it gets even better. That
always seems to be the case with this company!
Dr. Pepper Snapple Group's bottling agreement with CCE is "very
similar" to the one that it had with the Pepsi bottlers. The
Coca-Cola buyout of CCE's North American assets will presumably
trigger the same change of control clause that is typical in such
Does that mean another $900 million (or more) payment for DPS? I
wouldn't be surprised.
My $40 price target is looking VERY low.
It's time someone (besides this lonely investor) started counting
the cash at DPS.
Yes, the author STILL owns DPS shares.
On a Jobs/Jobless Friday, More Stimulus in U.S.,
Japan and Europe