Keurig Dr Pepper (KDP) Part III - The Business Of Gourmet Coffee And Soday

by Alex Mason | Companies, Episodes

This post may contain affiliate links. Please read the disclosure for more info.

Mental Details


  • Brought together by conglomerate JAB Holdings in 2018, gourmet coffee and beverage giant Keurig Dr Pepper was born in its current form. Although there is a growing diversity of brands, Keurig coffee and Dr Pepper soda are still the primary drivers of revenue.
  • In today's episode we cover the business model of the Keurig Dr. Pepper, as well as discuss its financials. We then spend some time synthesizing the information we’ve learned so far and touch on valuation.


  • Alex Mason: Today, we're going to wrap up our series on Keurig Dr. Pepper and talk about the business overview, the financials, and then some final thoughts that I have on the stock and the business. I'm Alex Mason, host of stock stories. This is the podcast where we decode investing principles by analyzing the business behind the stock, as well as learning about mental models in order to help you become a better investor.
  • [00:00:26] You ready? Let's go.
  • [00:00:55] Right. Welcome. Welcome to the stock stories podcast. Again, my name is Alex Mason, and I am your host. Thank you so much for joining me today. This is the show dedicated to helping you the individual investor make better investing decisions. And we're doing that by looking at case studies of real companies, as well as mental models.
  • [00:01:20] We're going through the entire S&P 500 together. And I'm so grateful that you're on this journey with me. If you listen to the last couple of weeks of episodes, you know, that we've been going through this interesting company called Keurig Dr. Pepper. And we've talked a lot about it so far, but today we're going to wrap things up.
  • [00:01:41] We talked already about the history of Dr. Pepper and its associated brands. As well as the history of Keurig and the coffee business. And now we're going to look at the combined entity today. What is the business like today and how does the business model work now as well as some of the financials. And then we're going to wrap up and I'm just going to share some of my thoughts about the stock and the business overall.
  • [00:02:07] So without further ado, let's get into it and wrap up our series on Keurig Dr. Pepper.
  • [00:02:25] Let's talk about the business overview of Keurig Dr. Pepper. So we talked a lot about the history of both of these companies, how they came to be sorts of things that went on in their histories. And then eventually we know that they eventually came together and they're now Keurig Dr. Pepper. They are currently the third largest beverage company in North America and they employ over 25,000 people.
  • [00:02:53] So they're quite the business. Today and they sell. As we know from the history, they sell two main types of things. They sell carbonated and non-carbonated beverages. And these mainly include soda juice, coffee, tea, and water. But within those categories, they have so many different brands they own or license 125 different brands.
  • [00:03:21] And then of course, in addition to this, they also sell the Keurig brewing system. Their primary brands are you guess it Dr. Pepper and Keurig, but they also have a lot of other really big brands like Canada, dry Mott's, Apple juice, green mountain coffee. And the original donut shop, shop coffee, carbonated beverages.
  • [00:03:43] They're sold both as fully bottled beverages, as well as concentrated syrups that are sold to the food service industry. If you remember back in the companion episodes of this Coca-Cola, which we talked about a few years ago, Coca-Cola doesn't actually sell bottles of Coca-Cola. They sell the syrup concentrate.
  • [00:04:06] That other companies and other people then use to make the carbonated drink that is then bottled or canned as Coca-Cola, but they don't actually sell the final product. They sell the syrup, Keurig Dr. Pepper. It seems like they do both. They bottle some of their own things, but they also sell the concentrated syrup as well.
  • [00:04:30] As far as the non-carbonated beverages, those are mostly sold in ready to drink form. That includes brands like Avi-on water, Snapple, Nantucket, nectars, et cetera, those kinds of things, those kinds of products are bottled and sold directly by the company. In many cases. One thing I want to talk about is Keurig here.
  • [00:04:53] So Keurig is definitely a big part of the business. There are now actually over 30 million households in the United States that own a Keurig system. So that's huge. That's a big percentage of the population. Just to give you a sense of the kind of scale that is the entire us population is somewhere in the neighborhood of 300 million.
  • [00:05:15] It, I know it's a little bit more than that. I don't know the exact number. But it's somewhere around that order of magnitude. So you're talking about almost 10% of the entire population of the United States has a Keurig system in their homes. So that's pretty impressive. That's pretty good market penetration, I would think.
  • [00:05:34] But also there's still room for growth there. Just based on the fact that so many people drink coffee and love coffee. And not only this, but Keurig Dr. Pepper owns the top 10 best-selling coffee brands in the United States. So they also, they own the distribution system. They own the Keurig machines, but they also sell the coffee itself.
  • [00:05:56] And I really like the fact that they're integrated in this way. They're not just selling one or the other, but they're selling this mechanism that allows people to. Refill over and over and over again, buying those little K-pods over and over and allows them to generate more revenue. And then eventually when a new Keurig machine comes up for sale years later, maybe they want to upgrade their existing brewer to that one.
  • [00:06:24] And then that's additional revenue for them. So they're making money on both sides here. And I really like that aspect of it. Okay. So now we know the products, but how does management actually classify the business? How did they separate these different parts? Will they categorize it into four different areas?
  • [00:06:44] There are coffee systems, there's packaged beverages, beverage concentrates, and then they have this last category, Latin American beverages. So we'll go through each of these briefly. So first we have coffee systems. These are the Keurig machines as well as different branded K-cups. And one thing I learned about the K-cups in my research is that seventy-five percent of the K-cup pods that exist in the U S are actually made by Keurig Dr.
  • [00:07:16] Pepper. And you might be saying, Alex, wait a minute. Why isn't that number 100%. Wouldn't Keurig make all of them. Well, not necessarily because as soon as you have a popular product competitors come in and try to copy it and make generic versions. And that's exactly what's happened here with Keurig.
  • [00:07:35] There are competitors. For example, if you go to a grocery store, I know one of them is called Aldi, and Aldi, they sell these generic K-cup pod competitors that you can buy. And it'll work with your Keurig machine. So there are competitors out there they're generic products, but I do think that it's pretty strong, that seventy-five percent of that specific market is dominated by this single company.
  • [00:08:03] That means that the competition, even though it exists, generics, aren't quite as good at. Muscling in on the market share of Keurigs official K-cups. So that tells me that they have pretty strong brands, pretty strong distribution systems and diversification there. Now, in addition to making the Keurig machines and the K-cup pods for their own coffee brands.
  • [00:08:29] They also sell accessories as well as non-coffee beverages such as hot cocoa and tea. Now, this is where it comes in for me personally, because actually here's a secret, I'm not a coffee drinker. I just never really got into it. So I'm one of those, probably few people out there that don't drink coffee. I don't know if there's as many of us out there.
  • [00:08:51] But I don't really drink coffee, but nonetheless, I still use a Keurig machine. Why? Because of the hot cocoa and tea, I enjoy tea and I enjoy hot cocoa, especially on cold winter days. Like we're having here in Chicago right now. I just love tasting that hot cocoa, especially at the end of the day. So they produce these K-cups.
  • [00:09:15] For other big brands and not just themselves. And you might be surprised to find out that they actually produce K-cups for the likes of Starbucks, Dunkin donuts. And McDonald's, we've talked about all three of those businesses here on the podcast, and all three of them are very strong brands and have powerful business models.
  • [00:09:37] And this is, this is interesting to me too, because other big brands come to them to develop these branded versions of their products for home brewing use. It's kind of like Keurig has dominated this home brewing niche and the big brands are like, well, we want to get our coffee in the hands of these people at home, but we don't really want to compete as much ourselves with having to get them the brewer and.
  • [00:10:07] And try to dominate that way. We'll just focus on selling it to them at our stores, but if they want it at home, then we'll just pay Keurig Dr. Pepper to make it for us. And that's basically what happens. So it's kind of this interesting relationship between these brands and the Keurig Dr. Pepper brand.
  • [00:10:25] Now, Walmart, which you can go back to episode 47 and listen to that episode, as well as Costco, listen to that episode, which is episode one 56. Those companies are major customers of K-cups and Keurig machines as well. So you can get a lot of Keurigs products at. Existing stores like Walmart and Costco.
  • [00:10:51] And you can get the brands that you may already love like Starbucks or McDonald's right at your home because of K-cup K pod system. So that's pretty interesting to me. Another area of their business is packaged beverages. This is exactly what it sounds like. These are sales of ready to drink brands, things like Snapple or Mott's or the Bai brand.
  • [00:11:16] Clamato is another one Hawaiian punch and there's many other brands. The third area of the business are beverage concentrates. These are the sales of the syrups that I mentioned the syrups that can make the carbonated beverages. And of course this includes things like Dr. Pepper crush, Canada, dry, the Schweppes brand.
  • [00:11:39] A&W root beer and it goes on and on and on. Now, interestingly enough, I actually used to drive by the manufacturing plant where they produce all of these syrups and bottle, all of these, all of these sodas, which is in St. Louis, Missouri. When I used to live there. Now 53% of the Dr. Pepper Schweppes and Crush brands are bottled and sold via Coca-Cola and Pepsi co.
  • [00:12:07] And there's this really interesting dynamic between Dr. Pepper, Keurig Dr. Pepper, rather, and Coca-Cola and Pepsi. They have these special long-term agreements with both of these other beverage giants that allow them to distribute. their beverages internationally and in certain jurisdictions, and these are like long-term contracts.
  • [00:12:31] These are 20 years with it. I think it's a 20 year contract with a 20 year renewal option. So until somewhere around 2053 Coca-Cola Pepsi and Dr. Pepper will all be working in concert to distribute. Their beverages around the world. So that that's not guaranteed to happen, but that's very likely to happen based on the current contractual system that they've got set up.
  • [00:12:58] So I think that's really interesting because instead of trying to shut Dr. Pepper down and. And destroy them or buy out all their brands. Coca-Cola and Pepsi have basically seem pretty content to work with Dr. Pepper and sell their brands in addition with their own brands, because they realize that people want all three people want brands from all three.
  • [00:13:24] Some people love Coke, more. Some people love Pepsi, more. Some people love Dr. Pepper more and that's kind of this. Happy little world that all of the soda brands live in, but I think it's also necessary for these brands to work together in a way because soda volumes have been declining, at least in the United States, from the research that I've seen, sort of volumes have been declining steadily over the years because people are getting more healthy.
  • [00:13:49] People are more aware of the health, the health deleterious health effects of sugary drinks, like Coke and Pepsi actually. Pretty much stopped drinking soda about a year ago. And it's been definitely beneficial to my health. I will have a soda from time to time, once in a blue moon. It's very rare occasion though, but it's just goes to show you that the entire business model of soda, sugary drinks.
  • [00:14:18] Is somewhat in trouble. And I, I do not want to finish this episode without clarifying that risk that I do see is there. And in fact, sort of volumes have been declining in the low single digits year after year in the United States, just because people want other things to drink. People want things that are healthier, but that is why.
  • [00:14:39] And we saw this with both Pepsi and Coke in those episodes. That is why these three companies are so focused on diversification. Now they're focused on the teas, the waters, the premium waters, they're focused on coffee. These are types of drinks that people want to drink and are seeking them out. And I don't know if that'll ever change.
  • [00:15:00] The taste will change over time. Who knows? Maybe there will be a period 50 years or a hundred years from now when people really, really want to. Drink soda again, I don't know. Or some other form of beverage that hasn't been invented yet, but the thing is these businesses are diversified. They have many brands under their umbrellas and they work together to make sure that people buy them and Keurig, Dr.
  • [00:15:24] Pepper is no exception to that. So let's get into the fourth side of their business, which is Latin American beverages. So this segment, this is just a geographic. Categorization of the part of their business, where they sell primarily to Mexico and the Caribbean, and in those regions of the world, they mainly sell products such as mineral, water, and juice.
  • [00:15:52] So most of their sales. Outside of Latin America are really focused on North America. This is not a company that is super global in their reach. At least not directly. Like I mentioned, because of their agreements with Coke and Pepsi, a lot of their international operations are really through those distribution channels because Coca-Cola, for example, they've got pretty much the best distribution system in the world.
  • [00:16:19] As I understand it, as far as a bottling and. Soda distribution system, because that's all they do. Coca-Cola is all about beverages. They're not, they're not selling Keurig coffee machines, you know, that's, that's what they do. So that's, those are the four aspects of the business. Now, one thing I noticed when reviewing annual report is their big customers.
  • [00:16:44] One thing that I noticed is that Walmart accounts for 13% of their sales directly. So that's something to keep in mind. I'm not too concerned about this because Walmart is a huge company and a strong company, but 13%, that is a decent percentage of sales. I do think that a lot of that is just the fact that people like to buy their Keurig machines at Walmart.
  • [00:17:09] People like to buy their K-cups. They like to buy their sodas there. And yeah, that's just a big customer for them, but something to keep in mind there, a key intellectual. Property piece for this business. To me, it seems to come in two forms. So first we have this diverse portfolio of strong brand names associated with beverages.
  • [00:17:34] For example, Dr. Pepper, you got these brand names that people have known for over a century in many cases, and they still continue to buy and drink those. Beverages. So to me, that's like, number one. Number two is you have this proprietary Keurig and K-cup pod technology, which they've successfully been able to spread throughout the United States over the past two decades or so.
  • [00:18:01] And it seems like it's still a brand that's growing. We'll get to the growth numbers in just a moment. But those seem to be the two main aspects of this business that are powerful. You've got a portfolio of strong. Brand names within the beverage space and then you have Keurig. And K-cup, now that we know a little bit about how the business functions today, let's talk about the financials.
  • [00:18:28] Now because of the various mergers and split offs, there's not exactly a clean record where we can look up the financial history of this business, but Hey, we'll do our best. And we'll look at some of the most recent fiscal year data for the business and its current form as well as some of the consolidated four year data provided for several years ago, which is the earliest.
  • [00:18:51] Easily accessible data I could get was back in 2015. So we'll be looking at 2015 fiscal year and 2019 fiscal year. So first let's start with a sales. How did the sales of this business grow? Well? They went from four and a half billion dollars in 2015 to over $11 billion in 2019. Very nice growth there.
  • [00:19:14] But again, we have to account for the fact that the business basically combined with. Keurig or Dr. Pepper, depending on how you look at it. So it's hard to just discern a growth rate here just because of the business combination, but nonetheless. That's a lot of sales, 11 billion in sales. This is definitely a big company.
  • [00:19:34] As far as the net income, we see a similar trend. We went from $500 million in 2015 to over a billion dollars in 2019. So doubling there, and that is again, due to the business combination earnings per share. It doesn't really help us that much to compare earnings per share from year to year because of the massive dilution of shares due to the business combination.
  • [00:19:58] And. It just the business combination. Just mess the numbers up. Right. That's what happens. That's what always happens. For example, in 2015, the business made $3 and 14 cents per share. But in 2019, it was just 88 cents per share. And if you were looking at that on the service, you would say, wow, like this is a business that's failing.
  • [00:20:17] Well, not necessarily, no. As we saw the net income more than doubled. So it's really a result of a capital structure. Fundamentally changing of this business, the business is coming into a new form. Stock was issued as a result of the merger. And before and after numbers for earnings per share, they're just not aligned to reflect that capital structure for both forms of the business.
  • [00:20:41] But the important point, I think to remember here is that 88 cents per share for 2019, that's kind of like the new benchmark number, I would say. As far as assets and debt. Well, we might as well continue to look at how this capital structure affected the rest of the business. How did they fund this merger?
  • [00:21:02] Well, their assets went from $4 billion to $49 billion. Huge increase in their asset base because of the combination. And then as far as their debt, they went from about $330 million in 2015 to nearly 13 billion. It's actually a little bit less about $12.8 billion in 2019, that's a huge increase in debt.
  • [00:21:27] And when companies merge, when they combine, they tend to use debt to do it at some level. So they became much, much, much more highly leveraged than before. And. That's one of the more concerning things. But I do want to mention, I did see some fiscal year data for 2018 a year prior to 2019. And that debt number was over $14 billion.
  • [00:21:52] So what does that mean? That means management seems to be focused on reducing the debt. And you can see it very clearly in the balance sheet. And we can see it as well. In the cashflow statement, speaking of the cashflow statement, let's go there to see what we can learn. Now, as far as operating cashflow, the business made over $750 million in 2015, and that increased to two and a half billion in 2019.
  • [00:22:21] So what is business combination? You have massively greater debt, massively, greater income, massively greater sales and massively greater operating cashflow, as you would expect, right? The business should be turning out more cash. So they're making about two and a half billion in cash. Invest in cashflow.
  • [00:22:36] It fluctuates significantly from year to year, and then the financing cashflow. It went from about just under a billion dollars in spending on financing cashflow to over 2 billion in 2019. Now, one thing I want to highlight here are the dividends. So this is a company that has been paying dividends for some time.
  • [00:22:58] And in 2015, they paid out a dollar and 15 cents per share. But again, the per share numbers they don't really help us because of this massive dilution. So we'll just focus on 2019. In 2019, they paid out 60 cents in dividends per share. Now a year prior in 2018, that number was just 30 cents per share. So guess what?
  • [00:23:22] The dividend literally doubled from year to year. After the business combination. So what does that tell us that tells us that management is focused on paying out a lot of their money to shareholders, and they're trying to do it pretty fast, pretty much in the short term, they are increasing that dividend.
  • [00:23:39] They want to get that money out to shareholders. And we'll, we'll explore this a little bit more in just a moment. And their shares outstanding. They have over 1.4 billion shares outstanding. So they definitely have a lot of stock out there. So that's something to consider as well, but that just reflects the current capitalization structure of the business.
  • [00:24:05] So now let's synthesize this information and let me give you some of my closing thoughts. The first off, I think Keurig Dr. Pepper is a great company. This is intuitively true to me because it's got great brands. It has brands that have stood the test of several decades and in some cases over a century, also it continuously buys and develops more brands over time.
  • [00:24:31] And it's moving into coffee and premium water businesses. And I think that that's going to bode well for them. Longterm people really love their coffee. People are beginning to love, more and more premium water and people spend money on them. People spend money on them because they want to move away from soda.
  • [00:24:50] And as human beings, we can't just not drink anything. Right. We have to drink something and there are obviously many options, but because of the strength of the existing brands, I do think that people will continue to gravitate toward those brands. As long as the business. Keeps up a healthy level of spending in their marketing department and is very wise about how they spend that, that marketing money.
  • [00:25:16] As long as these brands are at the top of people's minds, they're going to continue to buy them over and over again. And it becomes habit forming, just like any other brand, just like buying Coca-Cola was in the 20th century. It was super habit forming and their advertisements made that brand into what it is today.
  • [00:25:35] And I see that pattern also with the brands here in this company. So we're not, we're not buying some. We're not potentially buying some young upstart company that hasn't proven itself yet. Keurig Dr. Pepper. They have brands that have stood the test of time. Their youngest brands Keurig have been in existence now for a couple of decades already.
  • [00:25:56] And it's art. It's still well-known, it's still well-known and people love to buy their coffee. K-cup pods and their machines. It's also important to consider the current ownership structure of this company. We talked a little bit about capitalization structure mentioning that. The share count, increase, but let's also talk about the ownership.
  • [00:26:18] So remember J a B holdings that we've mentioned in part two of this series, the company that took Keurig private well that company, which is a conglomerate in Switzerland. I believe they own 67% of the company actually. So they're actually the majority owners of this company, even though it's publicly traded, they own 67% of it while Mondelez international, which is another.
  • [00:26:42] Food conglomerate. And they happen to be publicly traded. They own over 13% of the business. So that leaves less than 20% of the company for everyone else. So I would like to see more floats in the public markets to be sure, but I suspect that a company this mature will mainly be away for the other big shareholders.
  • [00:27:08] To continue to cash out of their investment. I mean, after all, they would not have made Keurig Dr. Pepper trade in the first place. If that wasn't their intention, if they didn't want to cash out in some form. So that's just something to keep in mind. This isn't the kind of business where it's almost entirely owned via the public.
  • [00:27:28] This is heavily owned by institutions, particularly too large. Companies, one of them private, one of the publicly traded. So that's another aspect of this business. That's just important to know about because there are risks there. If J a B decides that they want to take the business in a completely new direction, they maybe they want to sell it off.
  • [00:27:50] Maybe they want to do something with it. There they're the ones holding all the cards, right. They own two thirds of the company. So just something to keep in mind. Now the beverage brand names are of course, the older side of the business. And they're also the more predictable one, the food, food, and beverage industry as a whole is expected to grow around 4% annually or so over the next few years.
  • [00:28:14] So we're seeing slightly higher than inflation level growth and Dr. Pepper ships, the most cases out of all of Keurig Dr. Pepper soda brands. They sold over 760 million cases. And I'm including diet Dr. Pepper in there as well. And. They sold that many cases in 2019, their next most popular brand was Canada dry.
  • [00:28:40] And that was a distant second at just 140 million cases. And then all of their other brands that I mentioned, and even ones that I haven't mentioned, those have shipped much, much less. So what does that tell us? That means that the beverage component of Keurig Dr. Pepper as a company still relies really heavily on its namesake.
  • [00:29:00] Dr. Pepper. Dr pepper itself is the leader in soda for this company and continues to be. So now what about the coffee side of the business specifically? The at home coffee, remember Keurig that's their main focus. Is this at home coffee market? Well, the coffee industry overall is growing at slightly higher numbers around 5% annually, but let's also consider the explosive growth of Keurig in the past Keurig as a brand.
  • [00:29:31] Is definitely more mature in its phase of growth, but the amount of households buying Keurig systems in the United States is still expanding in the mid single digits. So I think the numbers are around 7% annually. So that tells us that yeah, the coffee industry and the beverage industry they're growing relatively slowly, let let's let's face those facts, but let's also look at the fact that the Keurig system level growth is still growing at around 7%.
  • [00:30:00] And they have a pretty well diversified set of brands. So that's kind of the situation we're looking at. We're looking at a slower, slow ish growing business. I might even call them a stalwart because of just the strength of all of these brands, because it's not just slow growing or it's slow growing, but with excellent brands, Now let's look at the earnings in 2020, the trailing earnings over the past 12 months have been 91 cents per share.
  • [00:30:32] And the stock price as I record this, it's around $32 per share. So, so that gives us a price earnings ratio of 35. Now that seems a little bit high, a little bit high right now, back in the crash of March, 2020, the stock came down to just $22 per share. So you would have gotten a pretty good deal there. I think.
  • [00:30:54] But that was true of virtually every company. Now with large mature businesses like this, I do think it makes sense to pay around 20 times earnings or less because these are large mature businesses. We don't want to pay too much for them because they're not going to grow their way out of a high valuation.
  • [00:31:12] So we need to be a little more careful with our valuations with large companies, such as Keurig Dr. Pepper. Now, what about the earnings for. 2020 they're expected in full. Now, remember we just talked about the trailing earnings, but what about the full official earnings they're expected to come in at, around a dollar and 41 cents per share, which is considerably higher than 91 cents.
  • [00:31:36] Now, if we apply the same valuation PE so price divided by earnings, that gives us 23 times earnings. So now we're talking about something that's a lot more reasonable from a valuation perspective. And then looking at the dividend, remember this is a company that's rapidly growing as dividends. It's about a 1.8% yield, nothing too crazy that a lot of income investors would be excited about.
  • [00:32:00] But since Keurig Dr. Pepper pays out 60 cents per share, and they doubled that just in this past year, that could be an interesting dividend play because the dividend just got doubled a year after the merger. Now I would expect significant dividend growth to continue in the next couple of years as the company settles down in its new form and continues paying off some debt.
  • [00:32:26] And let's just say that the dividend grows at 20% annually over the next five years. Which may seem like a really high growth rate, but I don't think that's so unreasonable just given the fact that they doubled it this past year and they have a lot of free cash flow to do it. So let's just run the quick calculation in that scenario.
  • [00:32:46] So they're growing at 20%, let's say they're growing their dividend hypothetically. So that means in five years in 2026, they'll be paying out a dollar and 49 cents per share in dividends. Now at this price point of $32 or so. You're getting a 4.6% yield on cost which is not too bad. So if you never heard that term before yield on cost, it's kind of like just looking at the yield.
  • [00:33:13] So the dividend yield today, but it's the yield in the future based on the price today. So if you pay $32 per share today, and the dividend grew for the next five years at that growth rate, the money you would be getting annually five years from now. Is a 4%, 4.6% yield on your particular costs of the shares.
  • [00:33:36] So just want to clarify that term real quick, a few other notes. So Keurig Dr. Pepper. Again, they rely heavily on these Dr. Pepper and Keurig brands, and it's frankly, it's just not as diversified as their bigger siblings Coca-Cola and Pepsi. Now that being said, they are really strong brands and. This has shown up in my personal life.
  • [00:33:58] As many of these companies and many of these stocks, do I got my wife, a Keurig as a Christmas present a few years ago. And to this day, like she loves that thing. It even had this weird malfunction after about a year of use, which might be a bad sign. But when I started looking at it, it was more of an electrical failure rather than a mechanical one after I was taking it apart and looking at it.
  • [00:34:20] But here's the point I want to make Keurig's customer support was excellent and they sent me a brand new one right away and that brand new one. That was years ago that they since replaced that and that particular Keurig machine still sits in my kitchen to this day a few years later and has not had any problems.
  • [00:34:40] And it gets used like every day, especially now in the winter time. So Keurig, they sell a quality product and I've seen it firsthand. So I do believe that the brand continues to be strong. So that's just a little personal note. I do think that Keurig. Happens to have great products. And they're growing at a decent rate that I think is sustainable.
  • [00:35:02] Now the valuation is close to 20 times earnings. So I do see a decent valuation kind of, kind of there. And I see strong income potential. Actually, as this company goes into harvest mode and starts paying out a lot of their free cash flow to shareholders and the business, they generate billions in cash.
  • [00:35:23] So they don't have to resort to borrowing a lot of money or diluting shareholders in order to do that, just like their peers in the industry. And keep in mind, they do have a lot of debt, but it seems like they're paying it off and they're making that a priority. So I'd like to add a final note about the returns of this business, and then clarify the reason why, why have I been spending so much time on this company in the past few weeks?
  • [00:35:49] I mean, The company itself, it doesn't seem like it's a super fast grower, right? I mean, they're growing maybe four or 5% as far as the industry, but their earnings, I believe, are actually going to grow much faster than that in general, because of the cost synergies between the two businesses, we're still very early on.
  • [00:36:09] In the merger, but why am I spending so much time? I carry Dr. Pepper. Okay. The historical returns of the beverage industry are incredible. They're amazing. Go back and check out the historical record of either Coca-Cola or Pepsi. And you will see that fact that people often ignore these types of businesses because they're very mature companies that are only growing in the mid single digits, or so as far as annual earnings growth and many times that's what wall street looks at as kind of the defacto.
  • [00:36:42] Hey, are you hot or are you not kind of proposition. But Kira Dr. Pepper is no exception to this, both in the earnings growth statement, as well as the amazing returns in the beverage industry statement take the historical returns of Keurig alone. For example, they have made a lot of people very rich over the years back when they were trading as green mountain coffee roasters.
  • [00:37:09] Now, when we discuss the history of the Dr. Pepper brand? How many times did it go public and private let's let's review this really quickly. So they were founded in 1885. They went public in 1946. They went private in 1984 in a leveraged buyout. They stayed private, but were bought out again in 1986 in a leveraged buyout.
  • [00:37:30] They merged with seven up in 1988. They went public in 1993. As Dr. Pepper seven up, they were taken private by Cadbury sweats in 1995. They were then spun off as Dr. Pepper Snapple group. In 2008, they were bought by J A B holdings to become a publicly traded subsidiary cured Dr. Pepper in 2018. So in their entire lifetime, as a brand, Dr.
  • [00:37:58] Pepper has changed hands eight times and they had been publicly available for investment at four different times throughout their entire history. Now in Jeremy Siegel's classic book, the future for investors. I've mentioned this book on the show in the past. If you haven't already read it, please do.
  • [00:38:18] It's one of my favorite investing books and it's just so good in this book. He calculates the return for all of the original S&P 500 components, every single one of them. And Dr. Pepper was one of the original components of the S&P 500 all the way back in the day in 1957. And what he calculated was that between 1957 and 2003, which is when the book was published in the latest data he had available at that time between those years, which is several decades.
  • [00:38:53] If you had an invested in Dr. Pepper, you would have made an over 18% annual compounded return. Now that is significant, not just because it's a great rate of return. But also because it happened over a period of decades and not just a few years, many people get excited about a business growing 20, 25, 30, 35%, 50% annually.
  • [00:39:23] But that growth is not sustainable in many cases. And often fizzles out over a couple of years, but with Dr. Pepper, you got 18% annual returns. Over decades. And that's what really builds wealth over time is that consistent cashflow generation that makes money for a year after year, that actually grows your wealth significantly.
  • [00:39:49] So if you go back and do the back testing, that's what you'll find about Dr. Pepper. They compounded at 18%. Now, this calculation assumed that when Dr. Pepper went private, because of course they went private several times. They assume that the money you made from that buyout, you put that into a typical S&P 500 index fund.
  • [00:40:10] And then when the shares became public again, you sold and put the money back into Dr pepper. So just a quick note on the assumptions there of how Jeremy Siegel arrived at that figure. But that level of return means that a single dollar invested into Dr. Pepper in 1957 would have turned into $2,392 and 22 cents by 2003.
  • [00:40:38] Now 2003 that's 18 years ago. So I'd have to do some more calculations myself, but. I bet that that would have turned into a lot more money even after that, by now, since we're almost 20 years in the future from the date as I record this. So that's just the note I want to close on with this stock story. Many times we don't need to find the next hot start up business.
  • [00:41:07] Many times we don't need to find. The business that's growing at 50% per year, although those are great. And I definitely like to research those as well, but sometimes we just need a reliable cash generator in our portfolio and cure Dr. Pepper looks like one of those businesses to me, based on all the history, all the research I've done.
  • [00:41:32] Obviously, if you haven't been able to tell by now, I've spent several hours researching this company and trying to understand it better. So sometimes we just need reliable compounders in our portfolio as investors, and it's worth it to me to look for those types of businesses and consider them, definitely consider them.
  • [00:41:55] Don't pay too high a price for them because they're not going to grow out of their valuations, but consider them. So that's the note I want to leave you with today and Keurig Dr. Pepper. Again, I think that's an excellent company. The valuation is okay. I would like to see it a little cheaper, of course, but that's how I feel about the business and stock as of today.
  • [00:42:19] So thank you so much for listening to this episode, but listening to parts one and two as well. Coming with me on this journey, in the soda and coffee business. And yeah, I really appreciate it. And so thank you so much for listening. If you want to help the show out sharing the show is the best way to do it.
  • [00:42:42] So share the show with a friend, someone who you think would really benefit from this information from this knowledge, from this insight. And I would really appreciate that. So thank you in advance. Also, if you want to get in touch with me. Please send me a direct message on Instagram @stockstoryteller or on Twitter also at stock storyteller, or if you just prefer email, send me an email at Alex at stock stories,
  • [00:43:10] So thank you again so much for listening and I'll see you next week.
  • [00:43:37] Intro Music: The
  • [00:43:38] Alex Mason: information presented here on stock stories is for informational educational and entertainment purposes only you and you alone are responsible for your investment and financial decisions. Please consult inappropriate tax legal or financial advisor that can analyze your specific situation in the context of your goals and circumstances.

Want to listen to another episode or check out another company?

Check out the full archive here.

You may also like…


Nov 25, 2020

Mental Model: Multiplying By Zero

Basic Definition If you multiply effort in any area by zero, then the effort is completely wasted. Explanation of the...


Nov 24, 2020

Ventas (VTR)

Ventas' Seniors Housing Sunrise of Lincoln Park, Chicago, IL . Image Source: Ventas Ventas is a healthcare Real...


Nov 23, 2020

Digital Realty (DRT)

One of Digital Realty's data centers. Image Source: Digital Realty Digital Realty buys and operates buildings that...

lesson Icon