Krause Fund Research | Fall 2015 Consumer Staples DR. PEPPER SNAPPLE GROUP, Inc. (NYSE: DPS)
Recommendation: HOLD November 13, 2015
ANALYSTS Zach Digmann Jun Ho Kang [email protected] [email protected] Current Price: $86.86 Paul Landherr Maddison Wignall [email protected] [email protected] Target Price: $94.44
COMPANY OVERVIEW Cash Returns Focus for Declining Dr Pepper Snapple Group, Inc. (DPS) is a long time leading brand owner, manufacturer, and distributor Beverage Market of non-alcoholic beverages within the beverage • DPS has committed to returning cash to industry. Dr Pepper Snapple Group's product lines investors by increasing dividends and are divided in to two main categories: flavored continuing to repurchase stock. We estimate that carbonated soft drinks (“CSDs”) and non-carbonated DPS will continue to repurchase $400M worth beverages (“NCBs”). DPS operates in three primary of stock per year. business segments: Beverage concentrates, Packaged • DPS operates in the beverage industry which is Beverages and Latin America Beverages. For the fiscal year ended 12/31/14, total revenues rose 2.07% in a mature declining state. To combat declining to $6,121 million. US sales DPS has invested in Latin America to pursue new growth opportunities. STOCK PERFORMANCE HIGHLIGHTS • The industry DPS operates in is going through 52 Week High: $90.95 changes due to consumer preference shifting 52 Week Low: $69.39 towards healthier alternatives as well as new Avg. 5-Year Weekly Beta: 0.704 regulation for unhealthy food and drink. Avg. Daily Volume: 1,268,190 • DPS operates only in the US, Canada and Latin America making their operations localized only SHARE HIGHLIGHTS in North America. This represents a geographic Market Capitalization: $16.41 b risk and doesn’t allow worldwide risk Shares Outstanding: 192.96 m diversification opportunities. Book Value/Share: $11.62 EPS: $3.77 YEAR STOCK PERFORMANCE 1-Year Forward P/E: 20.33 Yield: 2.6% Payout Ratio: 50.9%
COMPANY PERFORMANCE HIGHLIGHTS ROA: 8.53% ROE: 30.76% Source: MSN Money Sales: $6,121 m
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ECONOMIC OUTLOOK Unemployment: We believe there are five main macroeconomic Unemployment has an impact similar to that of GDP forces that affect the consumer staples sector. These on the consumer staples sector. While it may not drivers are gross domestic product, unemployment, have a direct impact, the consequences of inflation, consumer sentiment, and demographic unemployment can affect what products are shifts. purchased. As evidenced previously, it appears that when more people are laid off and without work as Gross Domestic Product: during the recession, consumers shift to private label Gross domestic product (GDP) is an indicator of the brands as a way to conserve money. As the economy overall health of the economy. In the third quarter, as improved, less private label goods were purchased. a percent change from the second quarter, U.S. GDP Unemployment is currently at 5.0%.[4] The previous grew at a seasonally adjusted 1.5%.[1] The consumer month also had dramatically higher job creation than staples sector is non-cyclical by definition. However, predicted at 271,000 jobs.[4] As shown in the graph we contend that the more robust the economy is, the below, unemployment has steadily been decreasing more consumers are willing to purchase name brand since 2010. A positive side effect of this decline is products over private label competitors. Since the that it can put upward pressure on wages. Average end of 2009 to the end of 2012, the number of people hourly earnings increased 0.4% over the previous purchasing private label products fell more than month as more became employed.[4] This association 10%.[2] This fact is particularly important as we are provides an explanation for the reason as to why analyzing DPS which is a name brand in the name brand goods are purchased more often in a beverage industry. solid economy with strong employment. Higher wages allow consumers to feel as though they are in After the economy recovered from the recession, a secure financial position, giving the incentive to GDP has remained relatively strong in the past five purchase name brand goods over the cheaper private years with minor contractions in the first quarters of label rivals. We expect the unemployment situation 2011 and 2014, as shown in the graph below. As to stay the same in the near term at 5.0%. We see consumers drive around two-thirds of the economy,[3] unemployment dropping slightly to 4.7% in 2-3 we expect the economy to get a slight boost at the years as the economy improves more, but not more close of the year with increased production for the than a slight decrease to stay around the natural rate holiday season. However, with the recent slowdown of unemployment. in Chinese growth, in six months we see GDP growing at 2.5%. In 2-3 years, we believe the U.S. economy will be on solid footing with steady employment and stronger oil prices giving rise to 3.3% long-term growth.
Source: Bloomberg
Inflation: The Consumer Price Index (CPI) is a measure of the change in the average price level of a fixed basket of Source: Bloomberg goods and services purchased by consumers.[5] This
2 key gauge of inflation has been persistently low in recent months due to low energy costs and low costs of imports, driven by the strength of the dollar. The last reported monthly change was -0.2%.[5] If the Core CPI is used (meaning food and energy prices are excluded), there was a 0.2% increase month- over-month.[5] In six months, we see a monthly change in the CPI of 0.2%. In 2-3 years when oil prices recover and with lower unemployment, we predict an annual inflation rate of 2.7%. Source: Bloomberg
The CPI matters to consumers because if prices are Consumer Sentiment: increasing at a rate faster than wages are increasing, The University of Michigan’s Consumer Survey shifts in product purchasing may be needed. Center questions 500 households each month on their Additionally, to look at the effect of inflation on the financial conditions and attitudes about the consumer staples sector, it is interesting to compare economy.[6] For November, consumer sentiment is the CPI to the Producer Price Index (PPI). By sitting at 93.1.[6] January 1996 is the base period comparing the graphs below, it is possible to see cost where consumer sentiment is 100. Thus, we believe increases that firms are absorbing that cannot be this is a strong reading for the current consumer passed along to consumers. With the exception of the outlook driven by strength in the job market and most recent year, the CPI appears to be much more stock market returns. Since the recession, as shown volatile than the PPI. Furthermore, it appears that in the graph below, consumer sentiment has risen producers are able to pass price increases along from poor readings in the 50s level.[7] As discussed reasonably well. When the PPI is increasing, so is the previously, consumers drive a majority of GDP CPI by an equal amount. This relationship would growth and consumer sentiment is directly related to suggest that producers are able to shift price changes the strength of consumer spending. Therefore, we see along to consumers more often than not, allowing this strong consumer sentiment number as a good them to avoid cost absorption. sign for the future economy. In the near term, we believe consumer sentiment will be at 94.5 based on rising wages. In 2-3 years, after GDP expands at a faster rate and inflation remains relatively normal, we believe consumer sentiment will measure 98.
Source: Bloomberg
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Demographics: exclusively in the beverage retail business, some Demographic shifts in the U.S. population will drive companies, such as Pepsi, also have more diverse the types of products purchased in the consumer holdings and include some food product lines. staples sector in the future. The U.S. population is aging, as evidenced by U.S. Census data. In 2002, the The industry has faced push backs over recent years percent of the population between 20 and 44 years due to people’s desire to be healthier. A common place for consumers to begin improving their health old was 36.3%.[8] By 2012, this percent of the has been eliminating high calorie drinks from their population had decreased to 33.4%.[9] This diets. As revenue declines, businesses will have to information shows that the United States population start relying on higher margins and diversification to is currently aging, as Baby Boomers enter the remain profitable. In recent years, the decline in oil postretirement stage. Soon, as this part of the and energy prices have allowed margins to increase population phases out, what will remain is a large, from decrease in transportation costs. Corn prices are younger population. This change will drive also a large input cost of sodas in the industry due to consumer demands in the coming future. In the the use of corn syrup as the primary sweetener. beverage products industry of the consumer staples sector specifically, you see this showing up in demands for healthier drinks. This suggests that in order to satisfy consumer demands, companies will need to begin to shift their product lines to meet expectations. Costs could increase as a result, but by getting ahead early and developing innovative products, companies could establish a competitive advantage in new products.
INDUSTRY ANALYSIS: BEVERAGES
Industry Description: Companies like Coca-Cola and PepsiCo have tried to The beverages industry consists of numerous increase revenues through sales in emerging markets, products which could be categorized into carbonated especially in Brazil, Russia, India and China. drinks, noncarbonated drinks, and alcoholic beverages.[10] Among the three sub-industries, the Industry Trends: carbonated soft drinks sub-industry has the largest Consumers typically consider three factors when representation. We focused our research on choosing a particular drink: taste, comfort, and nonalcoholic beverage industry. The non-alcoholic nutrition.[10] Most manufacturers of soft drinks earn industry is dominated by two corporations: Coca- money by selling their products to retailers rather Cola and PepsiCo. The non-alcoholic industry is split than directly selling to consumers. into primarily syrup manufacturers, which focus on the manufacturing of flavoring for soda and bottlers Although the market is made up primarily by large that use manufactured syrup and package product for manufactures there are opportunities for small niche retail sale. The alcoholic beverages are split into categories for businesses to operate. These niche brewers, distillers and vintners. markets are becoming more profitable and indicate that large companies will start to require more The nonalcoholic beverage industry’s major flexibility within product lines and new flavors. products include carbonated soft drinks, functional These changes in consumer taste require companies beverages, fruit beverages, sports drinks, energy to be more dynamic in their operations and require drinks, and bottled waters. While some companies in them to respond quickly to consumer preference the industry, such as Coca-Cola, are nearly changes.[10] With US consumers being more aware 4
of their health issues, it is evident that consumers are including carbonated soft drinks, functional switching from carbonated beverages to beverages, fruit beverages, sports drinks, energy noncarbonated beverages like ready-to-drink coffee, drinks, and bottled waters. Dr. Pepper Snapple bottled water, energy drinks, ready-to-drink tea, and Group would be defined as one of the followers sports drinks. mainly because of its smaller market share and much less international presence. Despite this, in 2009 carbonated beverage sales outperformed the noncarbonated category, due to Given the economic and industry outlooks, we consumers trading down to cheaper alternatives believe that Coca-Cola and PepsiCo are best including tap water and other alternatives.[10] Despite positioned. Despite laggard growth in the beverage the decrease in sales of noncarbonated category in industry because it is in a mature/decline stage of the 2009, we believe the growth of the noncarbonated life cycle, we believe Coca-Cola and PepsiCo are category will continue as economic conditions more suited to not necessarily grow, but to maintain improve. their business going forward because they have a large international presence. Bottled water has become a fast growing business within the non-carbonated soda category. Volume of Metrics/Companies Coca-Cola PepsiCo Dr Pepper Snapple Group sales were up 7.3% in 2014, following gains of 5.8% Market Cap 165.73B 133.97B 14.55B in both 2012 and 2013.[10] Bottled water will likely Share Price 38.10 91.20 76.20 Sales 45.72B 65.31B 6.20B continue to grow in the long term at a similar rate, Net Income 7.55B 6.51B 715.00M assuming new regulation following concerns about EPS 1.71 4.33 3.67 the safety of municipal water supplies, a general Debt Level 44.55B 31.46B 2.61B interest in healthy living, and the population’s Profit Margin 16.51% 9.98% 11.54% increasing affluence more than offset environmental P/E 22.31 21.09 20.77 concerns about plastic bottle usage are addressed by P/S 3.63 2.06 2.35 [10] P/B 5.84 8.19 6.45 companies going forward. To boost the source of Source: Bloomberg and Yahoo Finance category growth, manufacturers create new products that drive consumption. Their primary focus as an Catalysts for Growth/Change: area of growth is in the flavored or enhanced water Consumer Preference for Healthy Products: categories, including products with fruit flavors or [10] Companies should focus on having products that the addition of vitamins. meet consumer preference. Although carbonated soft drinks take up most of the sales revenue, companies Markets & Competition: should keep up with changes in consumer trends in The beverages industry is in a very competitive order to grow. The US market has become more environment with a highly consolidated market in sensitive to their diet and health and are facing an which two corporations make up 3/4 of the industry obesity problem. An easy way for people to reduce in terms of market capitalization. The market share calorie consumption is to avoid drinks that have a lot of the nonalcoholic beverage industry is of sugar in them. concentrated between three primary companies. Carbonated soft drinks, for example, reflect Cost of Energy & Raw Materials: Raw materials approximately 88% of US retail sales in the industry, include sugar, corn, aluminum, etc. Gross margin and are represented by the beverage brands of three would increase as cost of inputs in manufacturing companies: Coca-Cola, PepsiCo, and Dr. Pepper [10] nonalcoholic beverages decreases. Snapple Group Inc. As the statistics show, the major players in the nonalcoholic beverage industry Environmental Issues: As consumers are more aware are Coca-Cola, PepsiCo, and Dr. Pepper Snapple of environmental issues and make decisions based on Group Inc. Coca-Cola and PepsiCo are especially environmental effects, companies should take well positioned in this industry because they have a environmental issues into consideration. big market share with relative pricing power, brand power, international presence, and diverse products 5
Emerging Markets: As sales especially of carbonated Changes of commodity prices used in most products soft drinks in North America decline, the demand such as corn for corn syrup sweeteners and oil used from emerging markets would become more and for transportation costs are at historically low prices. more important in determining sales revenues. The In the case of corn, reliance on the weather makes issue of raising U.S. federal funds rate should be production out of the control of farmers and watched carefully for the short-term since it is opportunity for cheap oil may result in increased expected to have a huge impact on emerging markets reliance by other sectors or areas of the world that if the U.S. fed finally decides to raise rates after could cause overcompensation within a region that is keeping rates near to 0% since 2008. The most growing or modernizing at an unsustainable rate. significant catalyst for growth is an emerging global OPEC countries may also cut production to middle class and the ability for corporations to artificially raise prices again, similarly to what they penetrate these markets (IBISWorld). did in the 1970s. Global exchange rates and a strong dollar can also harm foreign sales and due to the Investment Positives/Negatives: historical strength of US markets in times of Positives: Operations on a global scale help diversify volatility the dollar could become stronger at the market exposure and create opportunities for growth same time that international products are weakening. as long as management is able to perform market research in each area and grow foreign market Porter’s Five Forces: exposures. The industry is less affected by volatile Industry Competition: HIGH; the beverage industry markets due to the continuous desire for beverages is highly consolidated with big major companies and some daily caffeine necessities. Global middle competing for market share. class growth projections indicate the possibility for the sale of more expensive items as opposed to the Threat of New Entrants: LOW; brand identity relatively inexpensive items preferred by poorer present in the beverage industry makes the threat of nations. A company’s ability to adapt to changing new entrants relatively low. High initial starting cost consumer tastes is determined by analyzing trends in for new entrants and low margins make it individual product sales around the world and make unattractive for new entrants. changes to products to meet this demand. Companies add value when they can adapt to these changes Threat of Substitutes: LOW; high cost, low margin without the need for new infrastructure in its place of of new products, and the domination of three largest operation. Multiple product lines provided by companies within the industry make the introduction companies allow the consumer to make choices of substitute products unattractive. Some companies along the spectrum of flavors and enables companies who have started operating in the beverage industry to sell/compete with each other, create brand loyalty tend to stay small and local. and establish name recognition allowing new products to be introduced with a name and badge of Bargaining Power of Suppliers: LOW; companies quality already attached to other items which will set are very large and have more power than bottlers expectations. they have contracts with. They have more power over the supply chain than the smaller companies that Negatives: Changing consumer preference requires they work with have. constant spending on R&D as well as market analysis which can be expensive and inefficient. Water Bargaining Power of Consumers: HIGH; Buyers quality and quantity available to bottlers affects the vote with every dollar they spend so each time one product quality and quantity that can be produced - company changes price the other will follow suit. Water makes up a huge portion of all products in this industry. Government taxes on sugary drinks are starting to become more common hurting sales and margins within those markets. Each product that falls under these regulations are affected negatively due to the product becoming more expensive for consumers. 6
COMPANY ANALYSIS made strides through acquisitions of other brands in the past. The strategy DPS uses relies on a focus of Executive Summary: building brands through market research, pursuing We rate Dr. Pepper Snapple Group, Inc. a HOLD. There are several positive and negative aspects DPS REVENUE BY BUSINESS SEGMENT Latin America Beverage affecting this conclusion. Although there are growth Beverages Concentrates 13% opportunities and generous return of cash through 20% dividends and stock repurchases the downside risk does not make this a viable purchase.
They have policies in place for returning cash to shareholders through share buybacks and dividends and have remain committed to it over the past few Packaged years. They have also experienced continuous Beverages 67% growth of revenue through times when the market for soda and other beverages has been in decline. With a beta lower than 1, it makes DPS more attractive in volatile markets. Regulation in foreign markets, high margin channels of market contact, improving reliance on retailers for a large portion of sales and logistics and continuing to grow their infrastructure minimal exposure to broader foreign markets such as network. Europe and Asia make the company more risky. Consumers are also starting to become more health Source: 2014 DPS 10-k Statement conscious and one of the first places they look to cut Products and markets: DPS product lines are divided calories is through beverages. into two main categories: flavored carbonated soft
drinks (“CSDs”) and non-carbonated beverages Company-Specific Analysis: (“NCBs”). Carbonated soft drinks include non-cola General information: Dr. Pepper Snapple Group, Inc. flavors which mainly include Dr Pepper, Canada Dry, (DPS) is an owner of several brands, manufacturer 7UP, A&W, and Sunkist. Non-carbonated beverages and distributer both beverage concentrates and include ready-to-drink teas, juices, juice drinks, products ready for consumer sale. They have water and mixers with brand names of Snapple, products in two main categories: carbonated and Hawaiian Punch, Mott’s, Clamato, and etc. Similar non-carbonated beverages. Their primary brands to other beverage companies like Coca-Cola and include: PepsiCo, DPS produces packaged products and manufactures beverage concentrates and syrups. According to its 2014 annual report, DPS a leading beverage company in the beverage markets of U.S., Canada, and Mexico. It not only serves national market, but also serves regional and niche markets within countries with regional products. DPS utilizes the mass media with social media for advertising and uses product changes in terms of package design and ingredient to promote sales. As with other beverage companies, DPS’s main customers include bottlers, DPS bottles their own products and outsource some distributors and merchandising companies. of their bottling to keep up with demand. DPS operates in three primary business segments: Analysis of recent earnings releases and managerial Beverage concentrates, Packaged Beverages and guidance: The most recent earnings releases of DPS Latin America Beverages. They develop new for the third quarter of 2015 show increase in EPS, products to meet changing demand and have also core EPS, and net sales by 9%, 10% and 3% 7 respectively compared to the prior year period. “For Source: Yahoo! Finance[17,18,19] and company 10-k statements [12,15,16] the quarter, BCS volume increased 2% with carbonated soft drinks (CSDs) increasing 2% and non-carbonated beverages (NCBs) increasing Competitive Environment: Dr. Pepper Snapple [11] Group makes up 8.7% of the refreshment beverage 4%.” This reported data is consistent with the fact rd that 1) CSD market is in the mature stage and 2) market making it the 3 largest company in this consumers are more selective in choosing what to category behind only PepsiCo and Coca Cola. The drink with the awareness of their health issues. The flavored carbonated soda drinks, drinks that are not main drivers of the increase in gross profit were Cola flavored, is a growing portion of the beverage lower commodity costs and improvements in industry that has been eroding the Cola portion of the productivity. The decrease in interest expense was market. The highly competitive market has faced due to fair value hedges and the repayment of senior declining domestic sales revenue over recent years, unsecured notes. These factors caused the increase in however, there are opportunities for growth through net income from 2013 to 2014. capturing market share and expansion to new global markets. Percentage of Sales 2014 2013 Net Sales 100% 100% Cost of Sales 40.70% 41.70% Gross Profit 59.30% 58.30% SG&A Expenses 38.10% 37.90% Income from Operations 19.30% 17.40% Interest Expense 1.80% 2.00% Net Income 11.50% 10.40%
Source: 2014 DPS 10-k statement
Production and distribution: With a limited amount of packaging from a third party manufacturer, DPS manufactures and packages about 90% of its product volumes. Its “warehouses are generally located at or near bottling plants and are geographically dispersed to ensure product is available to meet consumer demand.”[12] Principal raw materials utilized include materials used for packaging such as aluminum cans, glass bottles, PET bottles and caps, and paper Source: 2014 PepsiCo 10-k annual report products. These products are generally bought from suppliers at varying costs. In addition, raw materials Comparison to Industry Leaders: In comparison to include sweeteners, juice, fruit, water and other PepsiCo and Coca Cola, DPS is a small company. ingredients which are used for the production of The focus of the company is more similar to Coca beverages. DPS uses forward contracts and supplier Cola than PepsiCo because of the reliance on pricing agreements in order to mitigate the problem manufacturing and distribution networks as well as of price fluctuation of raw materials. brand loyalty within the beverage market. PepsiCo DPS KO PEP also has food segments such as Frito Lay and Quaker Gross Profit* 59.3% 61.1% 53.7% that DPS does not have. DPS, by market cap, is about Income Before Tax* 17.5% 20.3% 13.1% a 10th of the size of PepsiCo and Coca Cola. As a Net Income* 11.5% 15.5% 9.8% R&D Expense* 0.3% 5.2% 1.1% result, they must focus on market analysis and Advertising Expense* 7.7% 7.6% 5.8% catering products to demand. A company like Coca Transport & Storage Expense* 13.1% 5.9% 14.5% Cola, with more than 500 products available, takes Trailing P/E 21.1 22.6 21.33 Dividend Yield 2.49% 3.39% 3.02% the approach of making everything and seeing what * = % of sales people like which can result in wasted resources and
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R&D spending. Being a smaller company also indicating future growth can be derived from these requires them to be more careful spending their more new areas of business. restricted resources. Regulation: Food and beverage industries as a whole PepsiCo is a very diverse corporation. They operate are subject to many regulatory matters with regard to in both the beverage industry as well as snack food ingredients and the effects they have on people. On industries which could be an advantage for them. As January 1, 2014, Mexico introduced a one peso markets change they are able to take advantage of a (about 7 cents, or 10% of cost) tax[13] on beverages wide array of changing tastes rather than changes high in sugar content which could be damaging to within just the beverage industry. Less future growth in the country. This new regulation is diversification among products exposes DPS to more harmful to growth efforts in Latin America due to risk within the beverage industry but also allows higher pricing. This price increase drove management to focus more on their core business consumption down an estimated 6% in 2014 and by rather than trying to manage diverse product lines. December, they were down 12%.[13] A tax in Mexico Unlike Coca Cola and PepsiCo, which has the may start a trend within the region if other countries financial strength to spend much larger amounts of start to become unhealthy. However, the growth in money on transportation, distribution and R&D even the region was driven primarily by Penafiel’s growth if the expenses as a percentage of sales are similar. of 21% in Latin America. This drink is unaffected by Being more restricted can have benefits for DPS. the tax because it is a mineral water allowing They must conduct more research to utilize their continued growth of this category despite the new tax. facilities to their full potential and be more aware of Part of the reason for this increase is the tax that has costs and market trends. led to more Mexican people drinking waters.
Foreign Sales: From 2013 to 2014 sales in global Only two cities within the US have had success with markets rose lead by Latin America. In their primary such a tax: Berkeley California and the Navajo foreign market, Latin America, net sales rose 15% Indian Nation. Another 30 have tried and failed.[14] indicating strength and further growth opportunities These mixed signs over time have caused doubt within the area. They have focused on this region about the effectiveness of new taxes and regulation primarily because of the growth it generates, but on the industry although they appear to be working sales within the area look good on paper because they in more recent years. had a much lower sales from the start. Domestic sales increased 55 million dollars resulting in a 1.3% Payout Policy: increase while an increase of 70 million dollars DPS Total Payout Ratio as a Percent of Net Income resulted in a 15% increase in Latin America. 300.00% 248.97% 250.00% Instead of entering new markets DPS has committed 200.00% 128.49% themselves to North America and improving their 150.00% 107.98% 112.33% 101.91% distribution networks and bottling sites within the 100.00%
region. DPS has not pursued operations outside of % of Net Income 50.00% North and Latin America and have not indicated an 0.00% intention to expand into other foreign markets in the 2010 2011 2012 2013 2014 near future. This, however, leaves opportunities for Year future growth after they are comfortable with their infrastructure and distribution networks within their Data from 2014 DPS 10-k statement primary market of North America. After acceptable The dividend payout of DPS is relatively low levels are attained, investment in other foreign compared to industry leaders. The dividend yield on markets such as Asia and South America would DPS stock last year was 2.49%, lower than the 3.02% become more probable. In 2014 the Asia Pacific for PepsiCo and 3.39% by Coca Cola. The main segment of Coca Cola made up 11.4% of sales and reason for this difference is over the past year DPS the Europe portion made up 10.5% of sales has risen 22.77% in price while PepsiCo and Coke 9 have both declined in price by .39% and 3.59% Key Positives: respectively.[20, 21, 22] Over the past three years DPS Focus of management to pursue higher margin has returned $1.2B ($400M per year) through stock methods of sale. repurchases. As part of the repurchase program, DPS had a balance in their share repurchase account of Focused on matching consumer preferences to $172M and were approved for and additional $1B desirable products. repurchase in February of 2015. Along with these repurchases, the dividend has also been growing Returns of cash to shareholders. yearly and rose 7.7% from 2013-2014. These growing returns and share repurchases indicate that Key Negatives: DPS sees strength in their operations and believes Regulation in Mexico, a key area of growth. that their stock is undervalued. It also shows their commitment to return cash to investors. Reliance on few retailers for bulk of sales.
Catalysts for Growth/Change: Minimal exposure outside North America. One of the key factors for growth would be the responsiveness and success in terms of meeting After careful analysis of DPS, we came to the consumer preferences, trends, and health concerns. conclusion to issue a HOLD recommendation under For instance, the inclusion of non-carbonated the belief that the current stock price and the target beverages in the company’s product portfolio helps stock price are relatively close. In valuing DPS, we the company to survive from decreasing demand for used the discounted cash flow (DCF) model, carbonated soft drinks as consumers become more economic profit (EP) model, dividend discount aware of their health. Hence, the company have room model (DDM), relative valuation P/E ratio, and the for growth if it adheres to consumer demand and P/E growth ratio. Our model estimates DPS’s stock preferences. price as of November 13, 2015.
Cost of raw materials also plays an important role in determining the profitability of the company. With VALUATION DISCUSSION the current energy prices low, we believe DPS has Key Assumptions: potential for growth in terms of profitability since it Revenue Decomposition: We decomposed revenue is “significantly impacted by changes in fuel costs of DPS mainly by looking at individual segment due to the large truck fleet we operate in our results and forecasted the growth of each segment. distribution businesses and our use of third party DPS’s operations are divided into three segments carriers. Additionally, conversion of raw materials which include beverage concentrates, packaged into our products for sale uses electricity and natural beverages, and Latin America beverages. Our gas.”[14] DPS states that their transportation and forecasts are based on management’s discussion and warehousing costs in 2014 were $802M and were analysis, other analyst reports and our economic primarily related to shipping and handling. outlook.
Since DPS primarily focuses in U.S., Canada, and In forecasting future sales of each segment, we Mexico markets, it could grow by expanding its applied population growth rate of only the United markets throughout the world. One concern is that States and Mexico. According to the 2014 annual according to the 2014 Form 10-K, 88% of net sales report of DPS, the $6.1 billion of net sales in 2014 come from the U.S. market. Moreover, it could use comprised of sales in the United States (88%), the growth in Hispanic community within the U.S. to Canada (4%) and Latin America (8%).[12] The leverage its market coverage by finding ways to beverage concentrates segment and packaged attract the Hispanic consumers. beverages segment both operate within the U.S. and
Canada while Latin America beverages segment Key Investment Positives/Negatives (or S.W.O.T operates in Mexico and the Caribbean. In the Latin Analysis): 10
America segment, Sales in Mexico make up Bloomberg. The CAPM produced a cost of equity of approximately 91% of the net sales of this segment. 6.18%. Due to the minimal effects of the growth in population in Canada and the Caribbean we found Cost of debt: For return on debt, we used the yield to that the numbers were so small they were maturity of the 4.50% bonds due at year 2045 which insignificant to forecasted sales. Population growth was retrieved from Bloomberg. This issue was a 30- is important for DPS, especially in the US where 88% year bond to match the thirty horizon of the risk-free of revenue is generated, due to the market saturation rate. The pre-tax cost of debt is 4.62%. Assuming a and limited growth in the area. marginal tax rate of 34.8% consistent with 2014, the after-tax cost of debt is 3.01%. Along with the population growth rate, we incorporated our forecasts based on our economic Discounted Cash Flow & Economic Profit Models: outlook and historical growth rates. For instance, the The DCF and EP models utilize the core value Latin America Beverages segment yielded growth drivers of net operating profit less adjusted taxes rates of 11% and 15% in 2013 and 2014 respectively. (NOPLAT) and invested capital (IC). After Hence, we forecasted relatively higher growth rates completing a DCF and EP analysis, we predict an for Latin America Beverages compared to the other intrinsic stock price of around $94.50. This result two segments in the near future and had them suggests that DPS’s stock is undervalued by decrease to a sustainable growth rate for our approximately 9% from its current price of $86.86 as continuing value assumption. of November 13, 2015. The valuation takes in our positive outlook of DPS in growing its business in Cost of goods sold: We forecasted cost of goods sold the Latin America beverages segment and Mexico in as a percentage of sales. We used the average particular. historical percentage as the factor in forecasting COGS. We use a higher CV growth of NOPLAT than the implied rate because of our belief that during the Selling, general and administrative expenses: We continuing value period DPS will have an also forecasted SG&A as a percentage of sales by opportunity to enter another new market similarly to using average historical percentage as a factor. what it has done with Mexico. The strategic growth to new areas will allow DPS to maintain a higher Capital expenditure: As with many other accounts, growth rate than what is implied by the calculated we also forecasted capital expenditure as a amount. percentage of sales. We used 3% of net sales because it was provided by DPS under the management’s Dividend Discount Model: discussion and analysis section of the annual report. The DDM produced an intrinsic stock price of $51.23, suggesting the stock is currently overvalued Weighted Average Cost of Capital (WACC): by approximately 69%. Since the DDM is heavily WACC is calculated by assuming a capital structure dependent on future dividends paid, we believe that of 85.7% equity and 14.3% debt. Our calculation the intrinsic stock price produced does not accurately resulted in a WACC of 5.68%. portray the intrinsic value of DPS’s stock. According to the annual reports of DPS, DPS’s dividend payout Cost of equity: In deriving the return on equity, we ratio has been over 40% since year 2010. In addition utilized the Capital Asset Pricing Model (CAPM). to paying dividends, DPS has been repurchasing its Since our investment horizon is 30 years, we used the common stock to return cash to investors and use its 30-year US Treasury Bond rate of 2.87% as our risk- excess cash flow. This explains why the DDM free rate. We got the historical risk premium of 4.62% valuation is weak since companies return values to from Professor Damodaran’s estimate.[23] The beta customers not just through dividends and also that we used in finding cost of equity was 0.704 which DPS could use its excess cash for internal investment. was an average of 1-5 year weekly raw beta from
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Relative P/E and PEG Valuation: the continuing value predicts from year seven to the The relative P/E valuation yield stock prices of end of time. The sensitivity shown in the table $83.97 and $81.32 based on the P/E ratios of 2015 reflects these probable ranges. and 2016 respectively while PEG valuation yield prices of $73.11 and $71.97 based on the P/E growth COGS/Sales & SG&A/Sales: Selling, general and ratios of 2015 and 2016. Both the average P/E administrative expenses and Cost of Goods sold are multiple of comparable companies and the average the two largest expense items on the income P/E growth ratios declined and thus yielded lower statement. Since we calculated these using a valuation for 2016. Thus, the decline offset the percentage of sales method it is important for us to increase of DPS’s estimated EPS from $3.76 to $3.88 realize the effects of small changes in each expense in 2015 and 2016 respectively. We expect DPS’s account. Seen above is the effects of using slightly EPS to growth from 2015 to 2016 as net income higher and lower percentage of sales figures can have increases while the shares outstanding decreases. a significant impact on the price of DPS.
Sensitivity Analysis: CapEx % of Sales & Normal Cash: Capital Beta & Risk-Free Rate: The risk free rate we used expenditures and normal cash are less significant to and the beta associated with DPS are factors our model because they reflect small amounts used significant in our WACC calculation. The WACC is within the broader approximation of price. Although used to discount cash flows for the EP and DCF these are critical to the health of the business and can calculations and gives our estimated prices. Since create opportunities in the future they have less of an price calculations rely on dividing by a small number impact on the current valuation. a small change in the WACC makes the price volatile when changes to these assumptions occur. Beta and Risk Free Rates are used to calculate the required return on equity demanded by the investors. Since Important Disclaimer DPS is funded by 85.7% equity WACC is This report was created by students enrolled in the particularly sensitive to changes that effect required Security Analysis (6F:112) class at the University of return on equity. Iowa. The report was originally created to offer an Pre-Tax Cost of Debt & Equity Risk Premium: Pretax internal investment recommendation for the cost of debt and the equity risk premium are also University of Iowa Krause Fund and its advisory assumptions that can change the estimated price board. The report also provides potential employers while in calculating the WACC for DPS. Our pretax and other interested parties an example of the cost of debt can be affected going forward through a students’ skills, knowledge and abilities. Members changing interest rate environment. DPS has issued of the Krause Fund are not registered investment debt in a time when rates have been historically low. advisors, brokers or officially licensed financial These rates in the future may be higher and could professionals. The investment advice contained in result in a higher WACC making the estimated future this report does not represent an offer or solicitation price lower. to buy or sell any of the securities mentioned. Unless
otherwise noted, facts and figures included in this CV Growth of NOPLAT & CV Growth of ROIC: report are from publicly available sources. This Continuing value growth rate assumptions can drastically change the estimated price of DPS. The report is not a complete compilation of data, and its continuing value assumptions we made reflect our accuracy is not guaranteed. From time to time, the beliefs for future performance of DPS. A small University of Iowa, its faculty, staff, students, or the change in either continuing value assumption Krause Fund may hold a financial interest in the changes the price of DPS because the CV is the companies mentioned in this report. largest discounted value within the EP and DCF model. The number is larger than others because in our model we forecast six years into the future and 12
Sources [9] United States Census Bureau, Age and Sex Composition in the United States: 2012. [1] Federal Reserve Economic Data, St. Louis
[5] Bloomberg Business, Consumer Price Index [14] “Navajos Fight Their Food Desert With Junk Economic Calendar. Food And Soda Taxes”
[7] Federal Reserve Economic Data, St. Louis [16] PepsiCo, Inc. (2014). Form 10-K 2014. Federal Reserve Bank.
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[19] NYSE. (2015, September 23). PepsiCo, Inc. stock quote. Yahoo! Finance.
[20] NYSE. (2015, September 23) NYSE. (2015, September 23). Dr. Pepper Snapple Group, Inc. Key Statistics. Yahoo! Finance.
[21] NYSE. (2015, September 23) NYSE. (2015, September 23). The Coca-Cola Company Key Statistics. Yahoo! Finance.
[22] NYSE. (2015, September 23) NYSE. (2015, September 23). PepsiCo, Inc. Key Statistics. Yahoo! Finance.
[23] Professor Damodaran’s Website
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Dr Pepper Snapple Group, Inc. Key Assumptions of Valuation Model
Ticker Symbol DPS Current Share Price $86.86 Current Model Date 11/13/2015 Fiscal Year End 31-Dec
Pre-Tax Cost of Debt 4.62% Beta 0.704 Risk-Free Rate 2.93% Equity Risk Premium 4.62% CV Growth of NOPLAT 2.20% CV Growth of EPS 2.40% Current Dividend Yield 2.15% Marginal Tax Rate 34.83% Effective Tax Rate 35.15% Cost of Equity 6.18% WACC 5.68% CV ROIC 22.22% Dr Pepper Snapple Group, Inc. Revenue Decomposition
Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) Segment Results - Net Sales Beverage Concentrates 1,221 1,229 1,228 1,256 1,285 1,314 1,344 1,375 1,406 1,434 YoY Return 2.35% 0.66% -0.08% 2.28% 2.28% 2.28% 2.28% 2.28% 2.28% 2.00% Packaged Beverages 4,358 4,306 4,361 4,439 4,519 4,601 4,684 4,768 4,854 4,919 YoY Return 1.54% -1.19% 1.28% 1.80% 1.80% 1.80% 1.80% 1.80% 1.80% 1.35% Latin America Beverages 416 462 532 580 633 685 685 738 788 823 YoY Return -0.48% 11.06% 15.15% 9.10% 9.03% 8.18% 0.00% 7.80% 6.80% 4.40% Net sales 5,995 5,997 6,121 6,276 6,437 6,599 6,712 6,880 7,048 7,176 Total sales growth 1.56% 0.03% 2.07% 2.53% 2.56% 2.52% 1.71% 2.51% 2.43% 1.82% Dr Pepper Snapple Group, Inc. Income Statement
Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) Net sales 5,995 5,997 6,121 6,276 6,437 6,599 6,712 6,880 7,048 7,176 Cost of sales (2,500) (2,499) (2,491) (2,554) (2,620) (2,686) (2,732) (2,800) (2,868) (2,921) Gross profit 3,495 3,498 3,630 3,722 3,817 3,913 3,980 4,080 4,179 4,255 Selling, general and administrative expenses (2,268) (2,272) (2,334) (2,397) (2,459) (2,521) (2,564) (2,628) (2,692) (2,741) Multi-employer pension plan withdrawal - (56) - 000000 0 Depreciation and amortization (124) (115) (115) (132) (134) (138) (144) (149) (155) (161) Other operating income / expense, net (11) (9) (1) 11922(2)(1)(0) Income / loss from operations 1,092 1,046 1,180 1,204 1,233 1,256 1,274 1,301 1,331 1,354 Interest expense (125) (123) (109) (120) (139) (115) (149) (127) (127) (129) Interest income 2 2 2 111222 2 Other expense / income, net 9 (383) - 000000 0 Income / loss before provision 978 542 1,073 1,085 1,095 1,142 1,128 1,176 1,206 1,227 Provision / benefit for income taxes (349) 81 (371) (378) (381) (398) (393) (410) (420) (427) Income / loss before equity in earnings of subsidiaries 629 623 702 707 713 744 735 766 786 799 Equity in earnings of unconsolidated subsidiaries, net of tax - 1 1 111111 1 Net income / loss 629 624 703 708 715 745 736 768 787 801
Basic EPS$ 2.99 $ 3.08 $ 3.59 $ 3.76 $ 3.88 $ 4.13 $ 4.16 $ 4.43 $ 4.63 $ 4.79 Shares outstanding (million) 205.29 197.98 192.96 188.54 184.39 180.49 176.83 173.39 170.17 167.14 Dividends per share$ 1.36 $ 1.52 $ 1.64 $ 1.73 $ 1.78 $ 1.90 $ 1.92 $ 2.04 $ 2.13 $ 2.20 Dr Pepper Snapple Group, Inc. Balance Sheet
Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) Assets Cash and cash equivalents 366 153 237 227 (307) 420 (88) (52) 6 80 Accounts receivable 602 622 617 640 657 673 685 702 719 732 Inventories 197 200 204 207 212 218 221 227 233 237 Deferred tax assets 66 66 67 73 68 77 72 73 75 76 Prepaid expenses and other current assets 104 78 86 94 97 99 101 103 106 108 Total current assets 1,335 1,119 1,211 1,242 726 1,487 991 1,054 1,138 1,233
Property, plant and equipment, net 1,202 1,173 1,141 1,193 1,247 1,302 1,356 1,408 1,460 1,510 Investments in unconsolidated subsidiaries 14 15 14 14 14 14 14 14 14 14 Goodwill 2,983 2,988 2,990 2,990 2,990 2,990 2,990 2,990 2,990 2,990 Other intangible assets, net 2,684 2,694 2,684 2,678 2,675 2,674 2,673 2,673 2,673 2,673 Other non-current assets 580 127 159 377 386 396 403 413 423 431 Non-current deferred tax assets 130 85 74 57 57 60 59 61 63 64 Total assets 8,928 8,201 8,273 8,550 8,096 8,923 8,486 8,613 8,761 8,915
Liabilities Accounts payable 283 271 289 282 290 297 302 310 317 323 Deferred revenue 65 65 64 63 64 66 67 69 70 72 Short-term borrowings & current long-term obligations 250 66 3 500 0 724 250 245 249 265 Income taxes payable 45 33 10 (26) (27) (28) (27) (29) (29) (30) Other current liabilities 589 595 672 634 650 667 678 695 712 725 Total current liabilities 1,232 1,030 1,038 1,453 977 1,726 1,270 1,290 1,319 1,355 Long-term obligations 2,554 2,508 2,588 2,505 2,491 2,495 2,493 2,511 2,540 2,578 Non-current deferred tax liabilities 630 755 801 661 667 696 687 717 735 748 Non-current deferred revenue 1,386 1,318 1,250 1,318 1,352 1,386 1,410 1,445 1,480 1,507 Other non-current liabilities 846 313 302 336 344 353 359 368 377 384 Total liabilities 6,648 5,924 5,979 6,273 5,831 6,655 6,219 6,330 6,451 6,571
Stockholders' equity Cadbury’s net investment - - - 0000 0 0 0 Common stock & Additional paid-in capital 1,310 972 660 668 677 685 694 702 711 719 Retained earnings / deficit 1,080 1,393 1,771 1,746 1,724 1,720 1,710 1,718 1,736 1,762 Accumulated other comprehensive loss / income (110) (88) (137) (137) (137) (137) (137) (137) (137) (137) Total Equity 2,280 2,277 2,294 2,277 2,264 2,268 2,267 2,283 2,309 2,344 Total liabilities and stockholders' equity 8,928 8,201 8,273 8,550 8,096 8,923 8,486 8,613 8,761 8,915 Dr Pepper Snapple Group, Inc. Cash Flow Statement
Fiscal Years Ending 42369 2012 2013 2014 Operating activities: Net income / loss 629 624 703 Depreciation expense 203 196 199 Amortization expense 37 38 36 Write-off of deferred loan costs - - - Amortization of deferred revenue (65) (65) (65) Employee stock-based compensation expense 35 37 48 Deferred income taxes 91 138 43 Unrealized gain / loss on derivatives - - - Loss on early extinguishment of debt - - - Impairment of goodwill and intangible assets - - - Provision for doubtful accounts - - - Other, net (18) 35 21 Net change in operating assets and liabilities (430) (137) 37 Net Operating Cash Flow 482 866 1,022
Investing activities: Acquisition of business - (10) (19) Purchase of property, plant and equipment (217) (179) (170) Purchase of intangible assets (7) (5) (1) Investments in unconsolidated subsidiaries - - - Proceeds from disposals of property, plant and equipment 7 1 8 Proceeds from disposals of intangible assets - - - Issuances of related party notes receivables - - - Repayment of / proceeds from related party notes receivables - - - Other, net - (2) (3) Net Investing Cash Flow (217) (195) (185)
Financing activities: Proceeds from issuance of related party long-term debt - - - Proceeds from senior unsecured notes/credit facility 500 - - Proceeds from / repayment of bridge loan facility - - - Repayment of senior unsecured notes/credit facility (450) (250) - Repayment of related party long-term debt - - - Repayment of / proceeds from bridge loan facility - - - Net issuance / repayment of commercial paper - 65 (65) Repurchase of shares of common stock (400) (400) (400) Dividends paid (284) (302) (317) Cash distributions to Cadbury - - - Change in Cadbury's net investment - - - Tax withholdings net share settlements - (13) (16) Other, net 31 20 51 Net Financing Cash Flow (603) (880) (747)
Change in Cash (338) (209) 90 Effect of exchange rate changes on cash and cash equivalents 3 (4) (6) Cash and cash equivalents at beginning of period 701 366 153 Ending Cash Balance 366 153 237 Dr Pepper Snapple Group, Inc. Cash Flow Statement
Fiscal Years Ending 42369 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) Operating Cash Flows Net income / loss 708 715 745 736 768 787 801 Depreciation 132 134 138 144 149 155 161 Amortization Expense 6 3 1 1 0 0 0 Change in deferred tax assets (6) 5 (10) 5 (1) (1) (1) Change in long term deferred tax assets 17 (1) (2) 1 (3) (2) (1) Change in long term deferred tax Liabilities (140) 6 29 (9) 29 18 13 Changes in working capital accounts Accounts receivable (23) (16) (17) (12) (17) (17) (13) Inventories (3) (5) (5) (4) (6) (6) (4) Prepaid expenses and other current assets (8) (2) (2) (2) (3) (3) (2) Accounts payable (7)77 588 6 Deferred revenue (1)22 122 1 Non-current Deferred Revenue 68 34 34 24 35 35 27 Income taxes payable (36) (0) (1) 0 (1) (1) (1) Other Current Liabilities (38) 16 16 11 17 17 13 Other non-Current Assets (218) (10) (10) (7) (10) (10) (8) Other non-Current Liabilities 3499 699 7 Net Change in Cash Flows from Operations 485 896 934 902 977 991 998
Investing Cash Flows Capital Expenditures (184) (188) (193) (198) (201) (206) (211) Net Change in Cash Flows from Investments (184) (188) (193) (198) (201) (206) (211)
Financing Cash Flows Proceeds from issuance of long term debt (83) (14) 4 (1) 18 29 38 Payments of long term debt 497 (500) 724 (474) (5) 4 16 Payments of Dividends (333) (336) (350) (346) (360) (369) (375) Issuance of common stock 888888 8 Repurchases of Common Stock (400) (400) (400) (400) (400) (400) (400) Net Change in Cash Flows from Investments (311) (1,242) (14) (1,212) (739) (727) (713)
Net Change in Cash (10) (534) 727 (508) 36 58 74 Beginning Cash Balanace 237 227 (307) 420 (88) (52) 6 Ending Cash Balance 227 (307) 420 (88) (52) 6 80 Dr Pepper Snapple Group, Inc. Common Size Income Statement
Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of sales -41.70% -41.67% -40.70% -40.70% -40.70% -40.70% -40.70% -40.70% -40.70% -40.70% Gross profit 58.30% 58.33% 59.30% 59.30% 59.30% 59.30% 59.30% 59.30% 59.30% 59.30% Selling, general and administrative expenses -37.83% -37.89% -38.13% -38.20% -38.20% -38.20% -38.20% -38.20% -38.20% -38.20% Multi-employer pension plan withdrawal 0.00% -0.93% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Depreciation and amortization -2.07% -1.92% -1.88% -2.10% -2.09% -2.09% -2.15% -2.17% -2.20% -2.24% Impairment of goodwill and intangible assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Restructuring costs 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other operating income / expense, net -0.18% -0.15% -0.02% 0.18% 0.13% 0.03% 0.04% -0.03% -0.02% 0.00% Income / loss from operations 18.22% 17.44% 19.28% 19.00% 19.01% 19.01% 18.95% 18.93% 18.90% 18.86% Interest expense -2.09% -2.05% -1.78% -1.91% -2.21% -1.83% -2.37% -2.02% -2.03% -2.05% Interest income 0.03% 0.03% 0.03% 0.02% 0.02% 0.02% 0.03% 0.03% 0.03% 0.03% Loss on early extinguishment of debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other expense / income, net 0.15% -6.39% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Pretax Income 16.31% 9.04% 17.53% 17.11% 16.82% 17.19% 16.61% 16.94% 16.90% 16.84% Income Taxes -5.82% 1.35% -6.06% -6.02% -5.92% -6.03% -5.85% -5.95% -5.96% -5.95% Income / loss before equity in earnings of subsidiaries 10.49% 10.39% 11.47% 11.09% 10.89% 11.16% 10.76% 10.99% 10.94% 10.88% Equity in earnings of subsidiaries, net 0.00% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% Net income / loss 10.49% 10.41% 11.49% 11.11% 10.91% 11.18% 10.78% 11.01% 10.96% 10.90% Dr Pepper Snapple Group, Inc. Common Size Balance Sheet
Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) Assets Cash and cash equivalents 6.11% 2.55% 3.87% 3.62% -4.77% 6.37% -1.31% -0.75% 0.09% 1.11% Accounts receivable 10.04% 10.37% 10.08% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% Related party receivable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Note receivable from related parties 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Inventories 3.29% 3.34% 3.33% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% Deferred tax assets 1.10% 1.10% 1.09% 1.16% 1.05% 1.17% 1.07% 1.07% 1.06% 1.06% Prepaid expenses and other current assets 1.73% 1.30% 1.40% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% Total current assets 22.27% 18.66% 19.78% 19.78% 11.28% 22.54% 14.77% 15.32% 16.15% 17.18% Property, plant and equipment, net 20.05% 19.56% 18.64% 19.01% 19.38% 19.73% 20.20% 20.46% 20.71% 21.05% Investments in unconsolidated subsidiaries 0.23% 0.25% 0.23% 0.22% 0.22% 0.21% 0.21% 0.20% 0.20% 0.20% Goodwill 49.76% 49.82% 48.85% 47.64% 46.45% 45.31% 44.55% 43.46% 42.43% 41.67% Other intangible assets, net 44.77% 44.92% 43.85% 42.67% 41.56% 40.52% 39.82% 38.85% 37.93% 37.25% Other non-current assets 9.67% 2.12% 2.60% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Non-current deferred tax assets 2.17% 1.42% 1.21% 0.90% 0.89% 0.90% 0.88% 0.89% 0.89% 0.89% Total assets 148.92% 136.75% 135.16% 136.23% 125.77% 135.21% 126.43% 125.19% 124.31% 124.23%
Liabilities Accounts payable and accrued expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accounts payable 4.72% 4.52% 4.72% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Related party payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred revenue 1.08% 1.08% 1.05% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Short-term borrowings & current long-term 4.17% 1.10% 0.05% 7.97% 0.00% 10.97% 3.72% 3.56% 3.53% 3.69% Income taxes payable 0.75% 0.55% 0.16% -0.42% -0.41% -0.42% -0.41% -0.42% -0.42% -0.42% Other current liabilities 9.82% 9.92% 10.98% 10.10% 10.10% 10.10% 10.10% 10.10% 10.10% 10.10% Total current liabilities 20.55% 17.18% 16.96% 23.15% 15.19% 26.15% 18.92% 18.74% 18.72% 18.88% Long-term obligations 42.60% 41.82% 42.28% 39.92% 38.69% 37.80% 37.15% 36.50% 36.05% 35.93% Non-current deferred tax liabilities 10.51% 12.59% 13.09% 10.54% 10.37% 10.55% 10.24% 10.42% 10.43% 10.42% Non-current deferred revenue 23.12% 21.98% 20.42% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% Other non-current liabilities 14.11% 5.22% 4.93% 5.35% 5.35% 5.35% 5.35% 5.35% 5.35% 5.35% Total liabilities 110.89% 98.78% 97.68% 99.95% 90.59% 100.85% 92.65% 92.01% 91.54% 91.57%
Owners Equity Cadbury’s net investment 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Common stock & Additional paid-in capital 21.85% 16.21% 10.78% 10.65% 10.52% 10.38% 10.34% 10.21% 10.08% 10.02% Retained earnings / deficit 18.02% 23.23% 28.93% 27.82% 26.79% 26.06% 25.48% 24.96% 24.63% 24.55% AOCI/loss -1.83% -1.47% -2.24% -2.18% -2.13% -2.08% -2.04% -1.99% -1.94% -1.91% Total stockholders' equity 38.03% 37.97% 37.48% 36.29% 35.18% 34.37% 33.77% 33.18% 32.77% 32.66% Total liabilities and stockholders' equity 148.92% 136.75% 135.16% 136.23% 125.77% 135.21% 126.43% 125.19% 124.31% 124.23% Dr Pepper Snapple Group, Inc. Value Driver Estimation (In millions) Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) NOPLAT Computation EBITA Net Sales $ 5,995 $ 5,997 $ 6,121 $ 6,276 $ 6,437 $ 6,599 $ 6,712 $ 6,880 $ 7,048 $ 7,176 -COGS $ (2,500) $ (2,499) $ (2,491) $ (2,554) $ (2,620) $ (2,686) $ (2,732) $ (2,800) $ (2,868) $ (2,921) -SG&A $ (2,268) $ (2,272) $ (2,334) $ (2,397) $ (2,459) $ (2,521) $ (2,564) $ (2,628) $ (2,692) $ (2,741) -Depreciation & Amort $ (203) $ (196) $ (199) $ (132) $ (134) $ (138) $ (144) $ (149) $ (155) $ (161) -Other Op. Income $ (11) $ (9) $ (1) $ 11 $ 9 $ 2 $ 2 $ (2) $ (1) $ (0) +PV Debt from Leases $ 11 $ 10 $ 10 $ 10 $ 10 $ 11 $ 11 $ 11 $ 12 $ 12 EBITA$ 1,024 $ 1,030 $ 1,097 $ 1,193 $ 1,224 $ 1,254 $ 1,272 $ 1,303 $ 1,332 $ 1,354
Less: Adjusted Taxes: Total Tax Provision$ 349 $ (81) $ 371 $ 378 $ 381 $ 398 $ 393 $ 410 $ 420 $ 427 +Shield on Multi Year Emp. Pen. Plan$ - $ 20 $ - $ - $ - $ - $ - $ - $ - $ - +Shield on Interest Expense$ 44 $ 43 $ 38 $ 42 $ 48 $ 40 $ 52 $ 44 $ 44 $ 45 -Tax on Interest Income$ (1) $ (1) $ (1) $ (0) $ (0) $ (0) $ (1) $ (1) $ (1) $ (1) Other expenses/income$ (3) $ 133 $ - $ - $ - $ - $ - $ - $ - $ - -Shield on leases (1) (0) (0) (0) (0) (0) (1) (1) (1) (1) Adjusted Taxes $ 388 $ 114 $ 408 $ 419 $ 429 $ 437 $ 443 $ 453 $ 463 $ 471
Pus: Change in Deferred Taxes Current Deferred Tax Assets $ 66 $ 66 $ 67 $ 73 $ 68 $ 77 $ 72 $ 73 $ 75 $ 76 Long Term Deferred Tax Assets $ 130 $ 85 $ 74 $ 57 $ 57 $ 60 $ 59 $ 61 $ 63 $ 64 Total Tax Assets $ 196 $ 151 $ 141 $ 129 $ 125 $ 137 $ 131 $ 135 $ 138 $ 140 Deferred Tax Liabilities $ 630 $ 755 $ 801 $ 661 $ 667 $ 696 $ 687 $ 717 $ 735 $ 748 Deferred Tax Liabilities less Assets $ 434 $ 604 $ 660 $ 532 $ 542 $ 559 $ 556 $ 582 $ 597 $ 607 Net Change in Deferred Taxes $ 75 $ 170 $ 56 $ (128) $ 10 $ 17 $ (3) $ 26 $ 15 $ 10
NOPLAT $ 711 $ 1,086 $ 745 $ 646 $ 806 $ 834 $ 826 $ 876 $ 884 $ 893
Invested Capital Computation Operating Current Assets: Normal Cash$ 44 $ 44 $ 45 $ 46 $ 48 $ 49 $ 50 $ 51 $ 52 $ 53 Accounts Receivable$ 602 $ 622 $ 617 $ 640 $ 657 $ 673 $ 685 $ 702 $ 719 $ 732 Inventory$ 197 $ 200 $ 204 $ 207 $ 212 $ 218 $ 221 $ 227 $ 233 $ 237 Prepaid Expenses$ 104 $ 78 $ 86 $ 94 $ 97 $ 99 $ 101 $ 103 $ 106 $ 108 Total Operating Current Assets$ 947 $ 944 $ 952 $ 988 $ 1,013 $ 1,039 $ 1,056 $ 1,083 $ 1,109 $ 1,130
Operating Current Liabilities Less Accounts Payable$ 283 $ 271 $ 289 $ 282 $ 290 $ 297 $ 302 $ 310 $ 317 $ 323 Deferred Revenue$ 65 $ 65 $ 64 $ 63 $ 64 $ 66 $ 67 $ 69 $ 70 $ 72 Income Taxes Payable$ 45 $ 33 $ 10 $ (26) $ (27) $ (28) $ (27) $ (29) $ (29) $ (30) Total Operating Current Liabilities$ 393 $ 369 $ 363 $ 319 $ 327 $ 335 $ 342 $ 350 $ 358 $ 365
Net Operating Working Capital$ 554 $ 575 $ 589 $ 669 $ 686 $ 704 $ 715 $ 733 $ 751 $ 765
Plus: Net PPE$ 1,202 $ 1,173 $ 1,141 $ 1,193 $ 1,247 $ 1,302 $ 1,356 $ 1,408 $ 1,460 $ 1,510 Plus: Other Intangibles$ 2,684 $ 2,694 $ 2,684 $ 2,678 $ 2,675 $ 2,674 $ 2,673 $ 2,673 $ 2,673 $ 2,673 Plus: PV of lease obligation$ 219 $ 223 $ 200 $ 209 $ 219 $ 228 $ 238 $ 247 $ 256 $ 265 Plus: Other Assets$ 580 $ 127 $ 159 $ 377 $ 386 $ 396 $ 403 $ 413 $ 423 $ 431 Less: Non-Current Def. Rev.$ 1,386 $ 1,318 $ 1,250 $ 1,318 $ 1,352 $ 1,386 $ 1,410 $ 1,445 $ 1,480 $ 1,507 Less: Non-current Liab.$ 846 $ 313 $ 302 $ 336 $ 344 $ 353 $ 359 $ 368 $ 377 $ 384
Invested Capital$ 3,007 $ 3,162 $ 3,222 $ 3,473 $ 3,517 $ 3,565 $ 3,616 $ 3,661 $ 3,706 $ 3,753
ROIC Computation NOPLAT $ 711 $ 1,086 $ 745 $ 646 $ 806 $ 834 $ 826 $ 876 $ 884 $ 893 /Beg. Invested Capital$ 2,531 $ 3,007 $ 3,162 $ 3,222 $ 3,473 $ 3,517 $ 3,565 $ 3,616 $ 3,661 $ 3,706 ROIC 28.08% 36.13% 23.57% 20.05% 23.20% 23.71% 23.16% 24.22% 24.15% 24.10%
Economic Profit Beg. IC$ 2,531 $ 3,007 $ 3,162 $ 3,222 $ 3,473 $ 3,517 $ 3,565 $ 3,616 $ 3,661 $ 3,706 * (ROIC-WACC) 22.35% 30.39% 17.84% 14.32% 17.47% 17.98% 17.43% 18.49% 18.42% 18.37% EP$ 565.77 $ 914.06 $ 564.01 $ 461.22 $ 606.53 $ 632.43 $ 621.41 $ 668.50 $ 674.40 $ 680.60
Free Cash Flow Computation NOPLAT $ 711 $ 1,086 $ 745 $ 646 $ 806 $ 834 $ 826 $ 876 $ 884 $ 893 - Change in Invested Capital $ 476 $ 154 $ 60 $ 251 $ 44 $ 48 $ 50 $ 46 $ 44 $ 47 FCF $ 235 $ 932 $ 685 $ 395 $ 761 $ 786 $ 775 $ 830 $ 840 $ 846 Dr Pepper Snapple Group, Inc. Weighted Average Cost of Capital (WACC) Estimation COST OF EQUITY Risk Free Rate 2.93% Beta 0.704 Equity Risk Premium 4.62% COST OF EQUITY 6.18%
COST OF DEBT YTM 4.62%
WEIGHT CALCULATION Value of Equity: Share Price $86.86 Shares outstanding 192.96 Value of Equity $16,760.31
Value of Debt: Book Value - Long-Term Debt 2588 Book Value - Short-Term Debt 3 PV of Operating Leases 200 Value of Debt 2791.205625
Weight of Equity 85.72% Weight of Debt 14.28%
WACC Cost of Equity 6.18% Weight of Equity 0.857238368 Cost of Debt 4.62% Weight of Debt 0.142761632 Tax Rate 0.348328 WACC 5.73% Dr Pepper Snapple Group, Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs: CV Growth 2.20% CV ROIC 22.22% WACC 5.73% Cost of Equity 6.18%
Fiscal Years Ending 42369 2014 A 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) 2014 A 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)
DCF Model EP Model Free Cash Flow 394.78 761.05 785.70 775.29 830.17 839.84 22787.12 EP 461.22 606.53 632.43 621.41 668.50 674.40 19081.43 Periods to discount 1.00 2.00 3.00 4.00 5.00 6.00 6.00 Periods to discount 1.00 2.00 3.00 4.00 5.00 6.00 6.00 Discount Factor 1.06 1.12 1.18 1.25 1.32 1.40 1.40 Discount factor 1.06 1.12 1.18 1.25 1.32 1.40 1.40 PV CF 373.38 680.79 664.74 620.38 628.29 601.16 16311.04 436.22 542.56 535.07 497.25 505.94 482.73 13658.51 Value of Operating Assets 19879.78 Sum of Discounted EP 16658.28 Value of Non-Operating Assets: Beginning Invested Capital 3221.50 +Excess Cash 191.70 Value of Operating Assets 19879.78 +Investment in Subsidiary 14.00 Value of Non-Operating Assets: 0.00 205.70 +Excess Cash 191.70 +Investment in Subsidiary 14.00 Value of Debt: 205.70 -Short Term Debt -3.00 -Long Term Debt -2588.00 Value of Debt: -2591.00 -Short Term Debt -3.00 -Long Term Debt -2588.00 Value of Other Non-Equity Claims -2591.00 -PV Operating Leases -200.21 -Underfunded Pension -44.00 Value of Other Non-Equity Claims -ESOPs -48.00 -PV Operating Leases -200.21 -292.21 -Underfunded Pension -44.00 -ESOPs -48.00 Value of Equity 17202.28 -292.21 Shares Outstanding 192.96 Estimated Share Price 89.15 Value of Equity 17202.28 Shares Outstanding 192.96 Adjusted Price 94.44 Estimated Share Price 89.15
Adjusted Price 94.44 Dr Pepper Snapple Group, Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 42369 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)
EPS$ 3.76 $ 3.88 $ 4.13 $ 4.16 $ 4.43 $ 4.63 $ 4.79
Key Assumptions CV growth 2.40% CV ROE 34.42% Cost of Equity 6.18%
Future Cash Flows P/E Multiple (CV Year) 12.17 EPS (CV Year) $ 4.79 Future Stock Price $ 58.30 Dividends Per Share $ 2.20 Future Cash Flows$ 1.73 $ 1.78 $ 1.90 $ 1.92 $ 2.04 $ 2.13 $ 2.20 CV $ 58.30 Discount Periods 123456 6 Discount Factor 1.0618 1.1274 1.1971 1.2711 1.3496 1.4330 1.4330 Discounted Cash Flows$ 1.63 $ 1.58 $ 1.59 $ 1.51 $ 1.51 $ 1.48 $ 40.69
Intrinsic Value$ 48.36
Adjusted DDM Price$ 51.23 Dr Pepper Snapple Group, Inc. Relative Valuation Models EPS EPS Est. 5yr Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16 KO The Coca-Cola Company $41.38 $1.99 $2.07 20.8 20.0 2.80 7.43 7.14 PEP Pepsico, Inc. $98.04 $4.56 $4.84 21.5 20.3 6.18 3.48 3.28 STZ Constellation Brands Inc. $132.20 $5.13 $5.85 25.8 22.6 14.35 1.80 1.57 WFM Whole Foods Market, Inc. $29.55 $1.55 $1.63 19.1 18.1 7.57 2.52 2.39 TAP Molson Coors Brewing Company $93.81 $3.81 $3.92 24.6 23.9 3.20 7.69 7.48 Average 22.4 21.0 4.6 4.4
DPS Dr Pepper Snapple Group, Inc. $86.86 $ 3.76 $ 3.88 23.1 22.4 4.25 5.4 5.3
Implied Value: Relative P/E (EPS15) $ 83.97 Relative P/E (EPS16)$ 81.32 PEG Ratio (EPS15)$ 73.11 PEG Ratio (EPS16)$ 71.97 Dr Pepper Snapple Group, Inc. Key Management Ratios
Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) Liquidity Ratios Current ratio Current assets/Current liabilities 1.08 1.09 1.17 0.85 0.74 0.86 0.78 0.82 0.86 0.91 Acid-test ratio (Cash+ST Securities+A/R)/CL 0.79 0.75 0.82 0.60 0.36 0.63 0.47 0.50 0.55 0.60 Working capital Current assets - Current liabilities 103.00 89.00 173.00 -210.99 -251.31 -238.39 -278.33 -235.68 -180.73 -122.00
Activity or Asset-Management Ratios Receivables turnover ratio Net sales/Average A/R (net) 9.69 9.80 9.88 9.98 9.93 9.93 9.89 9.93 9.92 9.89 Average collection period 365/Receivables turnover ratio 37.66 37.25 36.94 36.56 36.76 36.77 36.92 36.77 36.79 36.90 Inventory turnover ratio COGS/Average inventory 12.22 12.59 12.33 12.43 12.49 12.49 12.44 12.49 12.48 12.44 Average days inventory held 365/Inventory turnover ratio 29.86 28.99 29.60 29.37 29.22 29.23 29.35 29.23 29.24 29.33 Payables turnover ratio Inventory purchases/Average accounts payable 9.07 9.03 8.91 8.95 9.18 9.18 9.13 9.17 9.17 9.14 Average days payables outstanding 365/Payables turnover ratio 40.25 40.41 40.96 40.78 39.77 39.78 39.96 39.78 39.80 39.94 Asset turnover ratio Net sales/Average total assets 0.66 0.70 0.74 0.75 0.77 0.78 0.77 0.80 0.81 0.81
Financial Leverage Ratios Debt to equity ratio Total liabilities/Stockholders' equity 2.92 2.60 2.61 2.75 2.58 2.93 2.74 2.77 2.79 2.80 Debt to total assets ratio Total liabilities/Total assets 0.74 0.72 0.72 0.73 0.72 0.75 0.73 0.73 0.74 0.74 Times interest earned ratio (Net income + interest expense + taxes)/Interest expense 8.82 5.41 10.85 10.08 8.89 10.93 8.59 10.28 10.47 10.52
Profitability Ratios Profit margin on sales Net income/Net sales 10.49% 10.41% 11.49% 11.29% 11.10% 11.30% 10.97% 11.16% 11.17% 11.16% Return on assets (ROA) Net income/Average total assets 6.91% 7.29% 8.53% 8.42% 8.59% 8.76% 8.46% 8.98% 9.06% 9.06% Return on shareholders' equity (ROE) Net income/Average stockholders' equity 27.69% 27.39% 30.76% 30.99% 31.47% 32.90% 32.47% 33.75% 34.28% 34.42%
Payout Policy Ratios Dividend payout ratio Dividend per share/EPS 45.48% 49.35% 45.68% 46.00% 46.00% 46.00% 46.00% 46.00% 46.00% 46.00% Total payout ratio (Dividend + Repurchase)/Net income 107.98% 112.33% 101.91% 102.47% 101.97% 99.66% 100.34% 98.10% 96.82% 95.95% Dr Pepper Snapple Group, Inc. Sensitivity Analysis
Share Price Beta 89.15 0.55 0.60 0.65 0.70 0.75 0.80 0.85 2.63% 97.30 97.30 97.30 97.30 97.30 97.30 97.30 2.73% 94.44 94.44 94.44 94.44 94.44 94.44 94.44 2.83% 91.73 91.73 91.73 91.73 91.73 91.73 91.73 RF Rate 2.93% 89.15 89.15 89.15 89.15 89.15 89.15 89.15 3.03% 86.69 86.69 86.69 86.69 86.69 86.69 86.69 3.13% 84.35 84.35 84.35 84.35 84.35 84.35 84.35 3.23% 82.11 82.11 82.11 82.11 82.11 82.11 82.11
Share Price Pre Tax Cost of Debt 89.15 4.32% 4.42% 4.52% 4.62% 4.72% 4.82% 4.92% 4.32% 95.69 95.38 95.07 94.76 94.46 94.16 93.86 4.42% 93.72 93.42 93.13 92.82 92.54 92.25 91.96 Equity Risk 4.52% 91.82 91.53 91.25 90.95 90.68 90.40 90.12 Premium 4.62% 89.99 89.71 89.43 89.15 88.89 88.61 88.35 4.72% 88.22 87.95 87.68 87.41 87.15 86.89 86.63 4.82% 86.50 86.24 85.99 85.72 85.47 85.22 84.97 4.92% 84.85 84.60 84.35 84.09 83.85 83.61 83.36
Share Price CV Growth of NOPLAT 89.15 1.300% 1.600% 1.900% 2.200% 2.500% 2.800% 3.100% 19.22% 74.33 78.14 82.54 87.70 93.81 101.18 110.23 20.22% 74.58 78.47 82.97 88.23 94.47 102.00 111.23 CV Growth 21.22% 74.80 78.77 83.35 88.71 95.07 102.73 112.14 of ROIC 22.22% 75.01 79.04 83.70 89.15 95.62 103.40 112.97 23.22% 75.20 79.29 84.02 89.55 96.11 104.02 113.73 24.22% 75.37 79.51 84.31 89.92 96.57 104.58 114.42 25.22% 75.53 79.72 84.58 90.26 96.99 105.10 115.06
Share Price COGS/Sales 89.15 -38.30% -39.10% -39.90% -40.70% -41.50% -42.30% -43.10% -36.70% 111.22 106.68 102.14 97.60 93.05 88.51 83.97 -37.20% 108.41 103.86 99.32 94.78 90.24 85.70 81.16 SG&A/Sale -37.70% 105.59 101.05 96.51 91.97 87.42 82.88 78.34 s -38.20% 102.78 98.23 93.69 89.15 84.61 80.07 75.52 -38.70% 99.96 95.42 90.88 86.34 81.79 77.25 72.71 -39.20% 97.15 92.60 88.06 83.52 78.98 74.44 69.89 -39.70% 94.33 89.79 85.25 80.70 76.16 71.62 67.08
Share Price CapEx % of Sales 89.15 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 0.30% 95.36 93.34 91.32 89.30 87.28 85.26 83.24 0.45% 95.31 93.29 91.27 89.25 87.23 85.21 83.19 Normal 0.60% 95.26 93.24 91.22 89.20 87.18 85.16 83.14 Cash 0.74% 95.21 93.19 91.17 89.15 87.13 85.11 83.09 0.90% 95.15 93.14 91.12 89.10 87.08 85.06 83.04 1.05% 95.10 93.08 91.06 89.05 87.03 85.01 82.99 1.20% 95.05 93.03 91.01 88.99 86.97 84.96 82.94 Dr Pepper Snapple Group, Inc. Operating Leases (In millions)
Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)
Operating Operating Operating Fiscal Years Ending 42369 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases 2015 47 2014 55 2013 56 2016 40 2015 44 2014 48 2017 32 2016 38 2015 39 2018 24 2017 30 2016 30 2019 21 2018 22 2017 23 Thereafter 75 Thereafter 76 Thereafter 60 Total Minimum Payments 239 Total Minimum Payments 265 Total Minimum Payments 256 Less: Interest 39 Less: Interest 42 Less: Interest 37 PV of Minimum Payments 200 PV of Minimum Payments 223 PV of Minimum Payments 219
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 4.62% Pre-Tax Cost of Debt 4.62% Pre-Tax Cost of Debt 4.62% Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 2.6
Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 47 44.9 1 55 52.6 1 56 53.5 2 40 36.5 2 44 40.2 2 48 43.9 3 32 27.9 3 38 33.2 3 39 34.1 4 24 20.0 4 30 25.0 4 30 25.0 5 21 16.8 5 22 17.6 5 23 18.3 6 & beyond 21 54.0 6 & beyond 22 54.9 6 & beyond 23 44.1 PV of Minimum Payments 200.2 PV of Minimum Payments 223.4 PV of Minimum Payments 219.0 Dr Pepper Snapple Group, Inc. Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 1,529 Average Time to Maturity (years): 8.20 Expected Annual Number of Options Exercised: 186
Current Average Strike Price:$ 45.27 Cost of Equity: 6.18% Current Stock Price: $86.86
2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Increase in Shares Outstanding: 186 186 186 186 186 186 186 186 Average Strike Price:$ 45.27 $ 45.27 $ 45.27 $ 45.27 $ 45.27 $ 45.27 $ 45.27 $ 45.27 Increase in Common Stock Account: 8.441 8.441 8.441 8.441 8.441 8.441 8.441 8.441
Change in Treasury Stock 400,000 400,000 400,000 400,000 400,000 400,000 400,000 400,000 400,000 per year included in deduction of Retained Earnings Expected Price of Repurchased Shares:$ 86.86 $ 92.23 $ 97.93 $ 103.98 $ 110.41 $ 117.23 $ 124.47 $ 132.17 Number of Shares Repurchased: 4,605 4,337 4,085 3,847 3,623 3,412 3,214 3,027
Shares Outstanding (beginning of the year) 192,958 188,539 184,388 180,490 176,830 173,393 170,168 167,141 Plus: Shares Issued Through ESOP 186 186 186 186 186 186 186 186 Less: Shares Repurchased in Treasury 4,605 4,337 4,085 3,847 3,623 3,412 3,214 3,027 Shares Outstanding (end of the year) 188,539 184,388 180,490 176,830 173,393 170,168 167,141 164,300 Dr Pepper Snapple Group, Inc. Valuation of Options Granted in ESOP
Ticker Symbol DPS Current Stock Price $86.86 Risk Free Rate 2.93% Current Dividend Yield 2.28% Annualized St. Dev. of Stock Returns 19.35%
Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 1,529 45.27 8.20 $ 37.77 $ 57,745 Total 1,529$ 45.27 8.20$ 51.68 $ 57,745