Why Fevertree Drinks plc could be a dividend stock with millionaire-maker potential

Fevertree Drinks plc (LON: FEVR) could soon be one of the market’s top income stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Fevertree Drinks (LSE: FEVR) have smashed the broader market over the past three years. Since hitting the market, the stock has gained 1,111%, and as the group’s products continue to fly off the shelves, I believe there are almost certainly more gains ahead for investors.

Indeed, only a few days ago the company reported that full-year results would be materially ahead of current market expectations as it dominates the market. Management stated in the release: “The exceptional performance in the UK, the group’s largest market, has been particularly impressive with the rate of sales growth and momentum strong across both the on and off trade. The mixer category is now the fastest growing category across the UK soft drinks sector with Fevertree responsible for 97% of the value growth in retail over the last 12 months.

City analysts had been expecting the company to report full-year earnings per share growth of 42% this year, followed by an increase of 10% next year. It now looks as if these figures are conservative. 

However, despite the company’s explosive earnings and share price growth, the one thing Fevertree lacks is income. The shares currently support a dividend yield of 0.4%, far below the market average of around 3.6%. 

I believe that this could change in the years ahead. 

Too much cash 

Fevertree has a problem that we’d all like to have, the company has too much cash. 

Last year the firm reported a cash flow from operations of £21m but spent only £800k on capital investments. The same trend occurred in 2015.  Cash flow from operations was £10m with capital spending of only £400k. This year it is on track to report £38m of cash generated from operations, but capital spending is set to come in at less than £1m. 

At the end of the first half, the firm reported a cash balance of £47m, with debt of only £6m for a net cash balance of £41m. Considering the current rate of cash generation, I believe that the cash balance will have expanded to around £60m by the end of 2017. 

Returning cash to investors 

Fevertree is piling up the money, and with investment opportunities limited, the company may have no choice but to hike its dividend to investors. 

This year, I estimate that the company will pay £11m in dividends to investors against a free cash flow of nearly £40m. Based on these numbers, Fevertree could double its payout this year quite comfortably with plenty of room left over for investment in expansion. 

And as the company continues to expand, the payout could grow exponentially. For the past two years, free cash flow has doubled every year. If this continues, next year the firm could produce around £70m in cash from operations, giving scope to hike the payout seven-fold to just over 60p per share for a yield of 2.9%. 

All in all, as Fevertree continues to expand and throw off cash, it looks as if investors will be well rewarded with both income and additional capital growth. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no stock mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

FTSE shares: the perfect ‘get rich slow’ idea?

As a long-term investor, Christopher Ruane reckons the FTSE 100 could offer him the foundations to create stock market wealth.…

Read more »

Investing Articles

Here’s how an investor in their 30s could aim to turn a £10k ISA into £132,676 by retirement

Christopher Ruane explains how someone with a 30-year investing timeframe could aim to increase an ISA stuffed with blue-chip shares…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have made a lot of investors very rich as they push to new heights. Dr James Fox explores…

Read more »

Investing Articles

£20k split between these 2 FTSE value stocks 1 month ago is now worth…

Harvey Jones has had his eye on two value stocks from the FTSE 100. Suddenly they've both taken off at…

Read more »

Investing Articles

Gold’s hit record highs – and these former penny shares have soared over 115%!

After gold recently hit record highs, it may be no surprise that two former penny shares focused on the yellow…

Read more »

Investing Articles

£20k in a Stocks and Shares ISA? Here’s how to target passive income of £633 a month

Christopher Ruane explains how an investor could turn a Stocks and Shares ISA into a passive income goldmine with a…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

How much passive income could I earn from dividends by investing £5,000 a year in the UK stock market?

When starting out it's often the first thing investors ask: how much passive income can I earn? Mark Hartley attempts…

Read more »

Young woman holding up three fingers
Investing Articles

3 steps to start investing with under £300

Christopher Ruane walks through a trio of steps that someone who wants to start investing with just a few hundred…

Read more »