Why I’d buy Fevertree Drinks plc and this dividend and growth stock for my ISA

This defensive firm complements the high-growth potential of Fevertree Drinks plc (LON: FEVR).

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The market likes today’s full-year results from IRN-BRU maker A.G. Barr (LSE: BAG) and the shares are up almost 3.5% as I write at 636p.

The figures are positive with revenue rising 8% compared to the year before, and basic earnings per share before exceptional items lifting 3.4%. Net cash at the end of the year stood more than 50% higher at £15m suggesting the good trading is manifesting as strong flows of incoming cash, just as we’d expect from a branded drinks manufacturer with defensive qualities in the business model. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 8%.

Good trading

Highlights included revenue growth of 25% from the Funkin brand, and that 99% of the firm’s products now avoid the government’s soft drinks levy aimed at discouraging high sugar content. I reckon it’s a good thing that the company moved fast to accommodate the new legislation, but there were a few disgruntled IRN-BRU customers on the radio recently when the new reduced-sugar version appeared in the shops!

Chief executive Roger White said that sales growth had been “broad-based” across the portfolio and “well ahead” of the general soft drinks market. He puts that down to innovation, strong core brands and partnership development. He thinks the firm’s “strong and flexible” business model and a growing stable of new and established brands will help maintain growth through uncertain economic times, which is what we investors are counting on when we buy into a defensive story like this today.

Dividend growth

Over the last four years, the dividend has grown 41%, which strikes me as a good indicator of the strength of the underlying business. There’s nothing visible on the horizon to suggest that dividend growth will falter, and I’m expecting more in the years to come. The shares trade on a forward price-to-earnings (P/E) ratio just over 18 for the year to January 2020, and there’s a forward dividend yield running close to 2.6%. The valuation has never been low as long as I can remember, but it’s fair given the underlying quality of the operation.

Meanwhile, premium mixer drinks producer Fevertree Drinks (LSE: FEVR) sports a much richer valuation. At the recent share price of 2,811p, the forward P/E ratio for 2019 works out at 56. This reflects the firm’s astonishing earnings growth rates over the past few years as it invented and grew a new market in Britain for premium mixer drinks, rapidly capturing a big share of sales from the old brand suppliers. The year-on-year figures for earnings growth over four years to 2017 are mouth-watering in themselves – 50%, 303%, 106% and 65% — but City analysts following the firm see a cooling of growth ahead, predicting rises in earnings of around 9% this year and 16% in 2019.

I reckon the high P/E rating lingers because Fevertree still has a lot to shoot for with its international expansion. If the brand takes off globally as it has in Britain we could see much more from the stock yet, which is why I think it would sit well in an ISA portfolio alongside Barr.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr. 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.

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