Here’s why I sold my Marston’s stock today

The Marstons’s share price has been boosted by news of a takeover offer. However, I decided to sell my stock in Marston’s today and here is why.

| 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.

I bought Marston’s (LSE: MARS) stock in late 2018 at a share price of 98p because, at the time, I thought it was worth closer to 140p. Marston’s shares were trading at a price-to-earnings ratio of around 7 when I bought, so they looked cheap. Also, there was a 7.6% dividend yield — on a trailing 12-month basis — on offer. Today I sold my Marston’s stock at 100p.

Why I bought Marston’s stock in 2018

I liked the portfolio of beer brands that Marston owned. The company had recently acquired the Charles Wells Brewery, expanding its presence in the UK ale market. There was a broad portfolio of pubs covering everything from upmarket to local taverns. Of particular interest was Marston’s rooms business. Rooms are either attached to pubs or in custom-built lodges next to a Marston’s pub. These offer a revenue source and also drive revenues at the pubs. Marston’s was adding a couple of hundred rooms a year, and increasing the occupancy rate and average daily rate (two key metrics in the hotel industry).

From 2005 to 2007, Marston’s issued £1.35bn of securitised debt. Around 70% of its pub estate was transferred to a wholly-owned subsidiary to act as dedicated collateral for these loans. Marston’s also has floating-rate obligations which it uses interest rates swaps to convert into fixed-rate payments. Thus the debt pile was sizeable and complex, but management had a plan to start reducing it.

Why I sold my Marston’s stock today

The Covid-19 pandemic has walloped Marston’s. It could do nothing about the lockdowns that decimated its revenue streams, cash balances, and share price. To survive, it had to raise more debt, reversing the plan to cut debt significantly by 2023. There is now around 6.5 times as much debt as equity on the balance sheet. Dividends were also cut.

A brewing tie-up with Carlsberg in 2020 offered cash to set off against debt, and possibly operating efficiency, which gave me some optimism. But then there was a £300m write-down of property and goodwill at the end of 2020. On 3 February 2020, Marston’s revealed it had rejected a recent 105p per share takeover offer and prior offers of 88p and 95p in December 2020. Management believes that the bids undervalue Marston’s. Maybe that is true, but the share price uptick provides an opportunity to get out for me.

Marston’s revenue had already dipped in 2019, before the pandemic. In hindsight, the pursuit of an ever-larger pub estate, funded through debt, looks to have been the wrong call. Now a smaller, higher-quality pub estate, with less leverage, seems to be what will prosper after the pandemic. Selling underperforming pubs is a way to reduce debt and the estate, but I believe Marston’s is hampered here because many pubs are tied up in the debt securitisation. And, there is a question of how much the pub estate is worth now given those writedowns.

It may be the case that a higher acceptable bid comes in. Or maybe management can guide the company through the end of the pandemic, cut debt, generate profits again, and lift the share price even higher. My decision to sell might one day look foolish. But right now, I cannot bear the risks I see in Marston’s stock.

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.

James J. McCombie does not own shares in any of the companies mentioned . The Motley Fool UK has recommended Marstons. 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 black man looking at phone while on the London Overground
Investing Articles

This 10.6% yielder beats every dividend share on the FTSE 100. Can it last?

Harvey Jones couldn't resist the double-digit yield on offer from this FTSE 100 stock. Now he'd like to get some…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

With the FTSE 100 flying, I love the look of this company

The FTSE 100 index has been in rally mode over the last few months, but I think one of it's…

Read more »

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »