For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects;
- Risks;
- Valuation.
Today, I’m looking at international brewer SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US).
Track record
With the shares at 3111p, SABMiller’s market cap. is £49,906 million.
This table summarises the firm’s recent financial record:
| Year to March | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue ($m) | 18,703 | 18,020 | 19,408 | 21,760 | 23,213 |
| Net cash from operations (£m) | 2,183 | 3,277 | 3,043 | 3,937 | 4,101 |
| Adjusted earnings per share (cents) | 137.5 | 161.1 | 191.5 | 214.8 | 238.7 |
| Dividend per share (cents) | 58 | 68 | 81 | 91 | 101 |
1) Prospects
The recent half-year results reveal respectable progress at SABMiller with a 4% rise in revenue compared to the year-ago figure. Looking at the table above, the firm seems to move steadily forward, increasing sales and earnings, and raising its dividend. Around the world, alcoholic beverage consumption remains popular and has great repeat-business credentials. That’s why investors often seem to hold SABMiller’s shares for their ‘defensive’ characteristics, particularly in times of economic uncertainty.
The firm is expanding across the world, with the latest results showing that 20% of revenue came from Latin America, 19% from Europe, 18% from North America, 16% from the Asia Pacific and 12% from wider Africa. The wide geographic spread of operations is reassuring, as well-performing regions can offset weakness in other regions. For example, on a constant currency basis, African turnover is up 11% whilst revenue from Europe declined by 1%.
Key to SABMiller’s on-going success is the strength of its drink brands. Consumers tend to be loyal to the firm’s trusted brands such as Miller Lite, Castle and Grolsch. However, the company tunes into its regional markets and many of its 200 or so beer brands remain market-specific without aiming to spread globally as is the strategy employed by some other brewers. That doesn’t mean SABMiller lacks punch; it is one of the world’s leading brewers with more than 200 beer brands and some 70,000 employees in over 75 countries. The company also has a growing business in soft drinks and claims to be one of the world’s largest bottlers of Coca-Cola products.
With such a broad reach, the great opportunity for SABMiller seems to be the way the firm has positioned itself to grow with the expanding affluence of populations in emerging economies.
2) Risks
The firm reckons it faced trading challenges in a number of territories during the first half of the year. For example, depreciation of the South African rand caused economic headwinds, and excise increases affected performance in Latin America. Meanwhile national strikes and social unrest caused havoc in Colombia — a global footprint is capable of bringing with it a variety of regional global difficulties. However, such issues appear to be temporary and global, brand-loyal beer drinking looks set to continue in the long run.
One investment risk for SABMiller shareholders is that the shares might cycle in and out of popularity. Investors tend to buy companies with ‘defensive’ businesses in uncertain times, which can drive P/E ratings up. So, there’s a risk of P/E compression as general economic cycles unfold and investors, perhaps, move on to ‘riskier’ investments.
Net debt is running at about 2.3 times the level of operating profits. The firm relies on its consistent cash flow to manage interest payments, which seems fine as long as nothing happens to threaten that cash flow.
3) Valuation
A forward P/E rating of just over 18 looks ahead of the 11% earnings growth and the 2.4% dividend yield expected in 2015. Forward earnings cover the forward dividend about 2.3%.
In my view, there’s plenty of room in that valuation for P/E compression going forward, which could compromise investor total returns.
What now?
SABMiller’s brand-driven growth leads to a strong economic franchise as customers return repeatedly to buy the firm’s brews, but I’m worried about the company’s premium valuation at this point in the economic cycle.
