Is Britvic the answer to my passive income challenge?

Finding an investment that pays a regular dividend can be a game changer for passive income. Does drinks provider Britvic tick all the boxes?

| More on:

Image source: Britvic (copyright Chris Saunders 2020)

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.

As an investor constantly on the hunt for solid dividend-paying stocks to bolster my passive income stream, Britvic (LSE:BVIC) has recently caught my eye – and it seems I’m not alone. Danish brewing giant Carlsberg has also set its sights on the UK soft drinks maker, with two takeover attempts already rejected this month.

This soft drinks giant, known for popular brands like Robinsons and J2O, has been making waves in the market. But is it the refreshing addition my portfolio needs, or could a potential takeover change the equation? Let’s dive in and take a closer look.

Market fizz

The shares have been bubbling up nicely, with an impressive 38.6% return over the past year. This significantly outperformed both its industry peers in the UK Beverage sector (which saw a 20.8% decline) and the broader UK market (which returned 5.8%). The recent takeover speculation has given the shares an additional boost, surging 10% on the day the approaches were made public.

Dividend income

The firm currently offers a dividend yield of 2.7%. While this might not be the highest yield on the market, it’s certainly nothing to scoff at in the current environment. What’s more, the company’s pay-out ratio stands at a reasonable 62%, suggesting there’s a decent amount of room for future dividend growth without putting undue strain on the company’s finances.

However, it’s worth noting that the company has an unstable dividend track record. Although not alone in disruption to supply chains over the last few years, this could be a potential red flag for investors seeking reliability in their passive income streams.

The valuation

According to a Discounted Cash Flow (DCF) calculation, the shares are currently trading at 36.3% below the estimated fair value. Although this isn’t a guarantee, when I see a company with some momentum, and plenty of potential growth ahead, I definitely want to take a closer look.

Carlsberg’s latest offer of 1,250p per share values the company at £3.1bn, representing a premium of about 29% to the share price before rumours emerged. However, the board believes this “significantly undervalues” the company.

Takeover considerations

The potential takeover adds an interesting dynamic to the investment case. On one hand, it could lead to a higher offer price, potentially providing a quick gain for current shareholders. Carlsberg sees “appealing long-term growth opportunities” in the firm’s portfolio.

On the other hand, a takeover would mean the end of the stock as a viable dividend investment. This could be disappointing for those seeking long-term passive income.

Next steps

Despite the uncertainty, I feel like there are reasons for optimism. Analysts forecast earnings growth of 12.5% per year, which could support future dividend increases and movement in the share price. The company’s international expansion and focus on healthier drink options could also drive growth in the coming years as consumer demands change.

So while Britvic might not have the highest-yielding dividend on the market, it offers an intriguing mix of growth, potential undervaluation, and passive income. For investors willing to accept some risk, Britvic could indeed be a refreshing addition to a portfolio. I’ll be adding it to my watchlist for now, keeping a close eye on how the situation develops.

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.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Britvic Plc. 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

Investing Articles

£10k in an ISA? Here’s how I’d aim to generate a ton of passive income

I dream of escaping the shackles of a salary with financial independence and a steady stream of passive income. Here’s…

Read more »

Investing Articles

Are Burberry shares a bargain or a value trap?

Appearances can be misleading in the stock market. Shares that look like a bargain can turn out to be a…

Read more »

Investing Articles

How I’d target £17,673 passive income with just £100 a week

Our Foolish writer explains how he’d build a portfolio capable of generating a life-changing passive income with limited capital.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

If I’d put £20k into a FTSE All-Share tracker fund 10 years ago, here’s what I’d have now

A lot of UK investors have money in FTSE All-Share tracker funds. Here, Edward Sheldon looks at how these products…

Read more »

Investing Articles

How I’d invest £10k in a SIPP to target £28,000 annual passive income

Investing just £10k today in a SIPP could be the key to a chunky retirement income in the long run.…

Read more »

Investing Articles

How I could earn a second income worth £35,000

Millions of us invest for a second income. Our writer explains how he's making it work and shares tips for…

Read more »

Investing Articles

3 ways Labour could impact the Rolls-Royce share price

Labour have swept to power on a pro-worker, pro-business ticket. But how could the new government influence the Rolls-Royce share…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

No savings at 35? I’d use Warren Buffett’s method to try and build massive wealth

Warren Buffett made most of his multi-billion-dollar fortune after turning 50. So what was his trick to building enormous wealth…

Read more »