Yahoo Finance Questor: Britvic’s growth and income potential gives soft drinks maker room to sparkle
Medium-sized companies have significantly outperformed their larger counterparts in recent years. In the past decade, for example, the FTSE 250 has generated a capital gain of 82pc. The FTSE 100, by contrast, is just 31pc higher than 10 years ago.
FTSE 100 shares generally offer higher dividend yields than their FTSE 250 peers, however: the two indexes currently yield 3.3pc and 2.2pc respectively.
However, some mid-tier shares, such as Britvic, a previous Questor tip, offer a potent mix of potential for both capital growth and income. The soft drinks maker has generated a capital gain of 115pc over the past decade, and is 16pc higher than at the time of our initial tip in July 2017, but still yields 2.9pc.
The company’s growth and income prospects remain sound even after an extremely challenging period during the pandemic, which caused a decline in “on-trade” consumption. Its latest quarterly update highlighted year-on-year revenue growth of 16.5pc as lockdown restrictions were eased. The diminishing prospect of further Covid restrictions should improve the on-trade outlook.
Since the start of the pandemic the company has made several changes to its portfolio of brands. It bought plant-based drinks company Plenish and expanded its partnership with PepsiCo to include the Rockstar energy drink.
This provides fresh growth opportunities, while the disposal of its private label juice business in France and the closure of its Ireland-based licensed wholesaler will allow it to focus on higher-margin products that offer superior growth opportunities.
Some of its products have also gained market share during the pandemic. This positions them for growth as the wider industry recovers. And, with innovative packaging and the launch of new flavours, the company may be in a stronger position relative to rivals than it was before Covid-19.
Like many businesses, Britvic is currently experiencing rising costs as a result of high inflation. However, disciplined cost control and improved procurement contributed to a 2.2 percentage point rise in operating margins in the 2021 financial year, while the strength of its brands provides more scope to pass rising costs on to customers than many rivals enjoy.
Its brands are also likely to remain in high demand even as the cost of living rises in the coming months. For example, longtime consumers of Pepsi may prove reluctant to switch to a cheaper alternative even as their discretionary income is squeezed.
Even if they do trade down, and Britvic’s short-term outlook deteriorates, it has the financial strength to further improve its market position through investment and acquisition. It reduced net debt by 6pc in its latest financial year, while its net finance costs were covered nine times by operating profits.
In terms of income appeal, the company’s 2021 dividend rose by 12pc but was still in line with its policy to pay half of net profits to shareholders. As operating conditions improve and its growth strategy boosts profitability, further dividend rises could make it an attractive income stock for the long term.
Trading on a forecast price-to-earnings ratio of about 14, Britvic’s shares offer good value for money. Its solid finances, capacity to pass higher costs on to consumers during a period of high inflation and growth strategy mean it offers further potential for strong total returns.
Questor says: buy
Ticker: BVIC
Share price at close: 821.5p
Update: MaxCyte
Shares in MaxCyte, whose machines help pharmaceutical companies make gene editing treatments, have gained 14pc since our initial tip in October 2020.
The company said last week that it expected first-quarter revenues to have increased by 69pc year-on-year. It also announced the departure of its chief financial officer.
The shares have been extremely volatile since our original tip. We expect more of the same: healthcare stocks are prone to violent swings. But MaxCyte has long-term potential. Hold.
Questor says: hold
Ticker: MXCT
Share price at close: 420p
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