Marston’s (LSE: MARS) has fallen out of favour with investors over the past 12 months. Indeed, over the past year, shares in the pubs and brewing company have declined by 21.6% excluding dividends. Most of these declines have come in the previous three months alone. Since the beginning of June, the shares have lost 16%.
Slowing growth
It seems that investors have turned their backs on the company because growth has slowed. Like-for-like sales at the group’s Destination and Premium division (which accounts for around 46% of revenue) for the 42 week period ending 22 July rose 1.3% while growth for the 12 weeks to 22 July slowed to just 0.6%.
And as growth is slowing, the company is facing higher operating costs thanks to inflation and wage growth. For the full year, City analysts expect sales across the group to grow only 2.8% including new openings. Higher costs are projected to consume all of this revenue growth and earnings per share for the year are expected to remain unchanged year-on-year.
Still, despite Marson’s lack of growth, shares in the company offer a highly attractive dividend yield of 6.7%, and the payout is covered 1.9 times by earnings per share, so there’s plenty of room for flexibility. Even though earnings growth is set to evaporate this year, analysts are still projecting a modest 2.8% increase in the full year dividend.
As well as the market-beating dividend yield, shares in Marston’s also trade at an extremely attractive valuation of only 7.9 times forward earnings. For some comparison, during the past five years, the company has traded at an average of forward P/E of 11.2. This implies that the shares are currently undervalued by around 30%.
Growth through acquisitions
Shares in peer Greene King (LSE: GNK) also look attractive considering the yield on offer.
Greene King is more than three times the size of Marston’s, and it appears that investors are willing to pay more for the company’s shares. At the time of writing the shares currently trade at a forward P/E of 9.4, even though earnings per share are expected to fall by 1% this year.
The company is experiencing much stronger growth than its smaller peer with like-for-like pub sales up by 1.5% during the 52 weeks to 30 April. Overall revenue for the period expanded by 6.9% and adjusted profit before tax grew 6.6%. The acquisition of Spirit helped boost sales and profitability overall, and over the next year, further benefits should be seen as the full impact of Greene King’s cost-cutting, and efficiency efforts show up in the figures.
As of yet, it seems potential synergies are not reflected in growth forecasts with City estimates projecting a modest 3% rise in earnings per share next year.
On the income front, shares in the company currently yield 5.2%, and it seems that this payout is here to stay. The dividend is covered twice by earnings per share leaving plenty of room to finance further pub portfolio growth.
