Sell These 3 Soft Drink Sellers?

Published Fri, 05 Feb 2016 18:15 CET by DividendYields.org

Overvalued describes a security with a market price that is considered too high based on the company’s fundamentals. For instance, a stock may be overvalued because investors have confidence in the company. A rise in investor confidence will surge the demand for the security, thereby increasing the market price. However, if the company’s balance sheet is not strong enough to support the market price, the stock will most likely decline in due term. Also, if the security is fairly valued and its price is not declining when the company’s fundamentals deteriorate, the security is most likely overvalued.

Beyond a company’s fundamentals, analysts use the Dividend Discount Model (DDM) to assess the present value of a security based on its projected dividend growth and dividend discount rate. Analysts look into the stock’s dividend history to calculating the average dividend growth over a certain period. For instance, if a stock has a dividend growth of 135% over the last 15 years, the projected average growth is 9% per year. The dividend discount rate is calculated considering the average dividend growth. Therefore, if the company declares a Dividend Per Share (DPS) of $ 1.85, with a 9% growth it will reach $2.02, but $2.02 is actually worth $1.75 today, because if you had $1.75 today, you could turn it into $2.02 with a 15% discount rate.

This article discusses three overvalued large caps that trade in the Beverages - Soft Drinks industry. All three stocks are trading over their present stock value, thereby representing opportunities to sell. The table below indicates that investor confidence is very important in determining the market price. PepsiCo and Dr Pepper Snapple are significantly overvalued (their market price is three times up their present price), although their fundamentals are not that strong.

Name Revenues Q3 2015 Revenues Q3 2014 % Change Net Income Q3 2015 Net Income Q3 2014 % Change Dividend/Share (DPS)
Coca Cola 11427 11976 -5% 1449 2114 -31% 1.32
Dr Pepper Snapple 1630 1583 3% 202 188 7% 1.92
PepsiCo 16331 17218 -5% 533 2008 -73% 2.81

Coca Cola, Dr Pepple Snapple and PepsiCo YoY Stock Performance Graph
The Coca-Cola Company (NYSE: KO) is an Atlanta-based beverage company that engages in the manufacturing and distribution of more than 500 sparkling and still brands around the globe. The Coca-Cola Company features its products primarily under 20 brand names, including Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Fanta, Sprite, Powerade, and Schweppes, among others, that generate more than $1 billion in annual retail sales. The Coca-Cola Company network is comprised of company-owned or controlled bottling and distribution operators, as well as independent bottling partners, distributors, wholesalers, and retailers.

Dividend Discount Model: Coca-Cola declares a dividend of $1.32 per share and its current market price is $42.44. Based on its dividend history, the projected dividend growth rate is 6% and the relevant discount rate is 10%. Thereby, the present value of the Coca-Cola stock is calculated as follows: $1.32 per share / (0.1 discount - 0.06 dividend growth) = $33. Given that the market price is higher than the present price, Coca-Cola is overvalued, representing an opportunity to sell.

Dr Pepper Snapple Group (NYSE: DPS) is a Texas-headquartered beverage company that engages in the manufacturing and distribution of non-alcoholic beverages in the United States, but also in Canada, Mexico, and the Caribbean. Through its Beverage Concentrates, Packaged Beverages, and Latin America Beverages segments, Dr Pepper Snapple offers a range of carbonated and non-carbonated beverages (NCBs) under the Dr Pepper, 7UP, Schweppes, Snapple, Mott’s, and other brand names.

Dividend Discount Model: Dr Pepper Snapple declares a dividend of $1.92 per share and its current market price is $94.75. Based on the stock’s dividend history, the projected dividend growth rate is 15% and the discount rate is 8%. Thereby, the present value of the Dr Pepper Snapple stock is calculated as: $.1.92 per share / (0.15 discount - 0.08 dividend growth) = $1.92 / 0.07 = $27.42. Since the present value is significantly lower than the market value, Dr Pepper Snapple is significantly overvalued, representing a great opportunity to sell.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Coca Cola 42.57 36.56 42.91 16.44% -0.79% 184.84 27.11 1.00 0.82 85%
Dr Pepper Snapple 89.27 72.00 95.87 23.99% -6.88% 17.65 24.81 0.97 0.76 51%
PepsiCo 97.05 76.48 103.44 26.90% -6.18% 142.64 29.05 1.96 0.77 83%

PepsiCo (NYSE: PEP) is a New York-based company that operates in the food, snack & beverages industry, globally known for a range of brand names, including Lays, Ruffles, Doritos, Cheetos and Quaker brands, among others. PepsiCo’s Asia, Middle East and Africa segments provide snack foods, cereals and snacks, beverage concentrates, fountain syrups, and finished goods as well as ready-to-drink tea products. T through a network of authorized bottlers, independent distributors, and retailers.

Dividend Discount Model: PepsiCo declares a dividend of $2.81 per share and its current market price is $92.21. Based on the stock’s dividend history, the projected dividend growth rate is 27% and the discount rate is 18%. Thereby the present value of the PepsiCo is: $0.72 per share / (0.27 discount - 0.18 dividend growth) = $2.81 / 0.09 = $31.22. Given that the market value is significantly higher than the present value, PepsiCo is significantly overvalued, thereby representing a huge opportunity to sell.


Stock name Dividend Yield
Coca-cola 3.51
Pepsico 3.14
Dr Pepper Snapple Group 2.00

Articles featuring Coca-cola (KO):

Performance Of The Top 10 Dividend Aristocrats 2019

This article should be interesting. The stock market is just crushing it, and there is just not much room for opportunity. You can reach for value, but are you reaching for true value or are you reaching at a poor company that has what appears to be strong dividend metrics? I thought to rewind the tape back and really take a hard look at the Dividend Aristocrats. You know, those companies that increase their dividend every year for at least 25 years+? Yes, that is who I am talking about.... Read more

The Best Dividend Stocks To Buy In A Slowing Economy

Due to reader requests, I've decided to break up my weekly "Best Dividend Stocks To Buy This Week" series into two parts. One will be the weekly watchlist article (with the best ideas for new money at any given time). The other will be the update on the Deep Value Dividend Growth Portfolio (which is beating the market by 4.1% after 11 weeks). To also make those more digestible, I'm breaking out the intro for the weekly series into a revised introduction and reference article on the 3... Read more

Bunker Dividend Growth Portfolio: Our First New Dividend King

Introduction To The Bunker Dividend Growth Portfolio I'm a huge fan of dividend growth stocks and dream of eventually becoming financially independent as defined by being able to live on 50% of my post-tax annual dividends alone. Being able to live 100% off passive income from a quality dividend growth portfolio is a dream shared by many of my readers. And it's not hard to see why. Historically, S&P 500 dividends have been 16 times more stable than stock prices, even during... Read more

43 Upcoming Dividend Increases - Are You Kidding Me?

Introduction I'm a huge fan of dividend growth stocks and hope you are too. If you do, you are in the right place! I've compiled a list of stocks that are increasing their dividend next week. This gives investors an opportunity to start or add to a position to capture an upcoming payment. This can be especially important for retirees who live on dividend checks. This list is a trimmed-down version only covering dividend increases. A full upcoming dividend calendar is always available... Read more

The Best Dividend Stocks To Buy In March

Due to reader requests, I've decided to break up my weekly "Best Dividend Stocks To Buy This Week" series into two parts. One will be the weekly watchlist article (with the best ideas for new money at any given time). The other will be the update on the Deep Value Dividend Growth Portfolio (which is beating the market by 6.5% after 10 weeks). To also make those more digestible, I'm breaking out the intro for the weekly series into a revised introduction and reference article on the 3... Read more