In an era of rising inflation and significant cost pressures, I am always on the look-out for Warren-Buffett-type stocks. These companies possess the following criteria: 1) they operate in a growing market; 2) they own world-class brands that enable them to raise prices to offset rising costs without damaging sales; and 3) they have a progressive dividend policy well supported by underlying fundamentals.
A stellar set of results
I think A.G. Barr (LSE: BAG) possesses the kind of qualities that Warren Buffett would be immediately attracted to. It owns the iconic Irn-Bru brand together with the likes of Rubicon, Funkin, and Strathmore Water.
In its full-year results for 2021, it reported a significant rise across a number of key financial metrics. Indeed, many of these metrics surpassed those attained pre-Covid. This included revenue, profit, earnings per share, and net cash. Given these impressive results, the business felt confident enough to reinstate its dividend. A payout of 12p per share equates to a yield of 2.2%.
As Covid pressures have eased, the business has begun to see a gradual reversing in consumer behaviour. As the hospitality sector reopened, its cocktails division was its stand-out performer. Like-for-like growth in the 10 weeks post-reopening was 61% higher than for the same period in 2019. Although some of these sales were undoubtedly related to pent-up demand, cocktail revenues continued to rise throughout the summer of 2021.
A.G. Barr also reported strong take-home sales. This was driven by multipack formats. Indeed, its diversified business model and exposure to significant growth opportunities is its real attraction.
In 2021, it bought a 61% share in MOMA Foods, with an option to buy the remaining shareholding over the next three years. This provides the business with exposure to the fast-growing plant-based milk market.
It is also investing heavily in a number of emerging trends. This includes the energy drink sector. It has already leveraged its leading IRN-BRU brand in this respect. More recently, it launched the Rubicon RAW energy range. This will enable it to cater for the emerging market trend of consumers looking for more natural, juice-based energy products.
A.G. Barr is facing “significant inflationary pressures”. Operating expenses increased 25%, driven by a combination of increased marketing and logistics costs. For example, its largest commodity spend, aluminium, has recently seen prices jump by 42%. Labour availability is also a factor that is likely to affect margins in the near term.
However, despite these significant headwinds, I am buoyed by the fact that trading continued to strengthen throughout the year. Combined with gains from operational efficiency programmes, together with commodities hedging, gross margins improved by 239 basis points.
The introduction of the sugar tax in 2018 does not seem to have dented consumer appetite for soft drinks, either. The latest data from the leading CGA drinks recovery tracker saw sales nationwide increase 10% in the week 19-25 February compared to 2020.
For me, A.G. Barr is the classic buy-and-hold stock. Its fortunes will, to a certain extent, always be tied to that of the wider economy. The power of its brands has undoubtedly enabled it to successfully navigate the last two years. It has a resilient balance sheet with net cash of £68m and huge growth potential from emerging consumer trends. For me, it’s an undoubted buy for my portfolio.