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Is Britvic the answer to my passive income challenge?

Image source: Britvic (copyright Chris Saunders 2020)
Image source: Britvic (copyright Chris Saunders 2020)

As an investor constantly on the hunt for solid dividend-paying stocks to bolster my passive income stream, Britvic (LSE:BVIC) has recently caught my eye – and it seems I’m not alone. Danish brewing giant Carlsberg has also set its sights on the UK soft drinks maker, with two takeover attempts already rejected this month.

This soft drinks giant, known for popular brands like Robinsons and J2O, has been making waves in the market. But is it the refreshing addition my portfolio needs, or could a potential takeover change the equation? Let’s dive in and take a closer look.

Market fizz

The shares have been bubbling up nicely, with an impressive 38.6% return over the past year. This significantly outperformed both its industry peers in the UK Beverage sector (which saw a 20.8% decline) and the broader UK market (which returned 5.8%). The recent takeover speculation has given the shares an additional boost, surging 10% on the day the approaches were made public.

Dividend income

The firm currently offers a dividend yield of 2.7%. While this might not be the highest yield on the market, it’s certainly nothing to scoff at in the current environment. What’s more, the company’s pay-out ratio stands at a reasonable 62%, suggesting there’s a decent amount of room for future dividend growth without putting undue strain on the company’s finances.

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However, it’s worth noting that the company has an unstable dividend track record. Although not alone in disruption to supply chains over the last few years, this could be a potential red flag for investors seeking reliability in their passive income streams.

The valuation

According to a Discounted Cash Flow (DCF) calculation, the shares are currently trading at 36.3% below the estimated fair value. Although this isn’t a guarantee, when I see a company with some momentum, and plenty of potential growth ahead, I definitely want to take a closer look.

Carlsberg’s latest offer of 1,250p per share values the company at £3.1bn, representing a premium of about 29% to the share price before rumours emerged. However, the board believes this “significantly undervalues” the company.

Takeover considerations

The potential takeover adds an interesting dynamic to the investment case. On one hand, it could lead to a higher offer price, potentially providing a quick gain for current shareholders. Carlsberg sees “appealing long-term growth opportunities” in the firm’s portfolio.

On the other hand, a takeover would mean the end of the stock as a viable dividend investment. This could be disappointing for those seeking long-term passive income.

Next steps

Despite the uncertainty, I feel like there are reasons for optimism. Analysts forecast earnings growth of 12.5% per year, which could support future dividend increases and movement in the share price. The company’s international expansion and focus on healthier drink options could also drive growth in the coming years as consumer demands change.

So while Britvic might not have the highest-yielding dividend on the market, it offers an intriguing mix of growth, potential undervaluation, and passive income. For investors willing to accept some risk, Britvic could indeed be a refreshing addition to a portfolio. I’ll be adding it to my watchlist for now, keeping a close eye on how the situation develops.

The post Is Britvic the answer to my passive income challenge? appeared first on The Motley Fool UK.

More reading

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Britvic Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024