Investing on a low income.

Author: lewys

Does Britvic (BVIC) offer value in an overpriced market?

While a confident bull market coupled with economic growth encourage riskier investments in sectors such as bio-tech and tech, conversely, any market panic (Brexit + lower forecast economic growth) tends…

While a confident bull market coupled with economic growth encourage riskier investments in sectors such as bio-tech and tech, conversely, any market panic (Brexit + lower forecast economic growth) tends to encourage investors to flock to safer, more predictable industries such as consumer staples and pharmaceuticals, after all, people always have to eat and drink!

If we are to look at the current economic climate things are far from certain in the UK. We are faced with low interest rates, a forced stimulus package from the BoE and the uncertainty of a British exit from the EU. This climate has undoubtedly driven investors to stocks such as Unilever, Reckitt Benckiser and even Nestle which are seen as safer investments. This means that it has become increasingly difficult to find value in the current market.

For example,Reckitt Benckiser is sporting a p/e ratio of 34, Nestle of 26 and Unilever of 24 meaning that investors are paying more for steady earnings. Whilst I still consider these stocks solid investments, it’s hard to see value for money at such valuations.

Having scoured the FTSE100 and FTSE250 to try and find value in the sector I came across Britvic PLC which I feel offers significant value to investors. Britvic Plc is a United Kingdom-based soft drinks company. The Company offers sparkling sodas, juice drinks, ice tea, squash, syrups, mineral waters, mixers and energy drinks. The Company operates through five segments: GB stills, GB cards, Ireland, France and International. The Company manufactures, markets and sells its range of brands, including Pepsi, 7UP, Lipton Ice Tea and Mountain Dew.

Britvic’s shares are down 11% over the past year on a cocktail of worries including the UK’s decision to impose a sugar tax and a slow start to the year with lower than expected revenue. But these are all short term pressures and the company can certainly adapt to such legislation.

With a p/e of just 15 and a progressive dividend policy with a 10 year streak of increasing dividends (bar a freeze between 2011-2012) This stock looks appealing, so let’s take a closer look.

The dividend

Britvic’s dividend payout ratio currently stands at 55% with a dividend cover of 1.8. Whist not excellent, this is a decent ratio meaning that the company has its dividend payments well covered. Given that the company follows a progressive dividend policy I can certainly see room for an increase in the dividend payout ratio in order to continue to increase the dividend in the short term if results disappoint.

The stock also offers a juicy yield of 3.7% – certainly not bad.

Any red flags?

One criticism of Britvic and a potential reason as to the low current valuation is the level of debt it carries. I am slightly concerned at the debt Britvic currently holds with a debt to equity ratio of 2.8 the company appears highly leveraged, especially for its sector, although this ratio has declined over the past 5 years due to an increase in assets and the debt is also well covered by earnings (5.1x). I would still be comfortable buying in at this level buy would certainly like to see a reduction in debt over the coming years.

Also, unlike other stocks mentioned in this article Britvic does lack diversity in its portfolio. I must emphasise that Britvic’s brands are restricted to the beverage industry and as such offer less security than diversified conglomerates such as ULVR.

Value

For me, Britvic PLC offers outstanding value in this overpriced sector. With a p/e ratio of only 15 and a history of a continued increase in EPS I feel that this stock is significantly underpriced by the market.

Using a dividend discount model I calculated a fair value of the stock as follows;

Britvic has managed to increase its dividends by an average of 6.61% over the past 5years. With an upward trend in EPS and room in the payout ratio I see no reason why we can’t conservatively estimate a yearly dividend growth of 6.6% for the stock going forward based on these factors.

I also factored in a discount rate of 10% accounting for the risk the debt poses and the relative uncertainty of this small cap stock compared to peers.

The equation – Price = Estimated value of next year’s dividend (1)/(discount rate – Dividend growth rate) gave me a fair value estimate of: 676.47p per share.

This means that according to my analysis this share appears 10.7% undervalued.

 

 

 

Disclosure: I currently hold no position in BVIC but do intend to initiate a position over the next month if capital allows me to do so.

9 Comments on Does Britvic (BVIC) offer value in an overpriced market?

Top three investing mistakes.

During my series – investing mistakes, I will cover a range of mistakes that anyone from a beginner to seasoned investor may make. Where I can, I will provide real…


During my series – investing mistakes, I will cover a range of mistakes that anyone from a beginner to seasoned investor may make. Where I can, I will provide real life examples of such mistakes (often at my own expense) so you can avoid them.

I’ll begin with the top three mistakes for beginners.

1. Buying because it’s busy.

One of the worst investing stories I ever heard was from a work colleague.
He told me that he had recently bought shares in HMV group. Why? – Because he went to buy a few things from their Swansea store and it was really busy.  It’s really important to remember that busy stores don’t equal profits and they certainly don’t equal financial stability.

Companies with busy stores could have poor margins due to pricing pressures, high levels of debt or even be on the verge of bankruptcy, as was HMV. Whilst in 2011 HMV stores may well have been busy it has massive debt and had to close 60 stores in order to reduce its debt pile. It later sold Waterstones for £53mn to try and further manage its debt pile. By 2013 administrators had been called in to try and save the ailing busnes.

ALWAYS check a company’s fundamentals before buying and don’t get sucked into hype.

This seems obvious to many but unfortunately this rationale for buying stocks is often quoted by many of my colleagues and friends.

2. Buying based on future earnings projections.

I have to admit, this is one mistake that I myself have made. If you take the time to look at my portfolio page you will see that I have a position in Whitbread. My rationale for initiating this position was, in reflection, considerably flawed.

Why did I buy Whitbread? I had just received a tax rebate and had some cash I seriously wanted to invest. Having scoured my watchlist I took a closer look at Whitbread and got suckered in by the future earning projections that analysts were making for the company. I saw consensus EPS of 3.06 for 2018 and then calculated the forward p/e ratio to 16 based on the £50 per share price tag.

I plunged into the shares recklessly happy with the ‘value’ I was getting for these notoriously expensive shares in full confidence that EPS would indeed grow. In fact I was buying in at an expensive p/e ratio of over 21 and was essentially ‘betting’ that the company would perform,

Needless to say, projections don’t equate to earnings – something clearly pointed out by Benjamin Graham in his book, The intelligent investor. A few downwards revisions later and my shares are worth closer to £40 each. Although the dividend investor inside me is quick to emphasise that a stock’s price doesn’t affect the income stream I get from it the value investor inside me is quick to point out that I significantly overpaid for the stock.

Although I’m still confident owning the shares, it is abundantly clear that I paid over the odds for my stake. I paid around 21 p/e which was a much more expensive multiple than its historic average of around 16.

3. Buying because ‘you think’.

Another mistake that’s often made is purchasing a stock because you own a crystal ball. I have too many friends who have bought shares in companies such as Tesla and countless green energy shares because ‘that’s the future’.. right?

Although it may be true that green energy will eventually replace fossil fuels that doesn’t mean that the shares on offer in that sector are worth the high p/e multiples that some sport. Always be careful before buying a share in any sector and don’t just buy a share because it’s in a sector/niche that you think will be successful – there may be better peers.

Make sure your rationale is secure before purchasing a stock and don’t rush in because of your preconceptions. Always do your homework and don’t think you ‘know’ anything because of a few headlines you read in a newspaper or from conversations with your friends.

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