Britvic (LSE:BVIC) has been quite a lucrative dividend stock in the FTSE 250 over the last decade. Having grown its shareholder payouts for seven years in a row (between 2012 and 2019), investors saw their passive income nearly double.
Sadly, the pandemic halted the firm’s impressive streak as lockdowns unsurprisingly punched beverage sales on the nose. But since then, management has steered the ship back on course. As such, dividends have resumed their upward trend, almost entirely recovering to pre-pandemic levels.
|Dividend per Share (p)
At its current stock price and payout level, investors can immediately unlock a £100 annual income stream by simply buying 340 shares in this soft-drinks empire. With a dividend yield of 3.3%, this transaction would cost just over £3,000. However, assuming the firm can resume its historical average dividend expansion of 7.8%, this annual payout could grow substantially in the long run.
With that in mind, let’s take a closer look at this FTSE 250 enterprise and what caveats investors must consider before jumping on the passive income bandwagon.
What does Britvic do?
Britvic is one of the largest non-alcoholic beverage manufacturers in the UK. When strolling down the drinks aisle in the supermarket, if a brand isn’t owned by Coca-Cola, chances are Britvic is behind it.
The firm’s brand portfolio includes household names like Robinsons’, J20, Lipton Ice Tea, and Fruit Shoot, among others. And it’s even the company responsible for bottling PepsiCo products as well.
But its presence stretches beyond just the UK since Britvic has operations scattered worldwide, including France and Brazil. The latter has proven to be a challenging operating environment, given poor weather conditions led to a knock-on crop supply, resulting in a drop in sales volumes. And yet it seems Brazilian consumers are still happy to pay a premium because management raised prices to offset this impact, resulting in a 17% revenue growth from this market.
Overall, sales volumes were up slightly in its latest results, and profit margins are rising. So it’s not a surprise that interim dividends were once again hiked, pushing the FTSE 250 stock’s yield in the right direction.
Even FTSE 250 stocks have risks
I’ve already highlighted the supply chain challenges Britvic is tackling in South America. However, some other concerning factors could pose a significant risk to dividends if not taken care of.
As it stands, the group has around £732m of loan obligations and equivalents on its balance sheet. And with interest rates being hiked by the Bank of England, the firm’s financing costs have jumped from £7.8m to £11.4m over the past year.
The company still generates more than enough cash flow to cover this expense. However, continued rate hikes will likely place increasing pressure on the FTSE 250 stock’s bottom line. If left unchecked, dividend growth could grind to a halt.
Nevertheless, management has highlighted that it’s monitoring its interest rate risk exposure. And with economic conditions beginning to improve, future rate hikes could be set to slow in the coming quarters.
Therefore, with the company seemingly back on track, investors may find Britivic an excellent candidate for an income portfolio. At least, that’s what I think.