Does SABMiller plc Pass My Triple Yield Test?


Like most private investors, I drip feed money from my earnings into my investment account each month. To stay fully invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE 100 is up 78% on its March 2009 low, and the wider market is no longer cheap — it’s getting harder to find shares that meet my criteria for affordability.

In this article, I’m going to run my investing eye over brewer SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US), to see if it might fit the bill.

The triple yield test

Today’s low interest rates mean that shares have become some of the most attractive income-bearing investments available.

To gauge the affordability of a share for my income portfolio, I like to look at three key trailing yield figures –the dividend, earnings and free cash flow yields. I call this my triple yield test:

SABMiller Value
Current share price 2,764p
Dividend yield 2.4%
Earnings yield 5.6%
Free cash flow yield 4.0%
FTSE 100 average dividend yield 2.9%
FTSE 100 earnings yield 5.8%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.8%

A share’s earnings yield is simply the inverse of its P/E ratio, and makes it easier to compare a company’s earnings with its dividend yield. SABMiller’s 5.6% earnings yield indicates that the global brewer currently trades on a trailing P/E of 17.8, marginally higher than the FTSE 100 average of 17.3.

SABMiller’s dividend yield is slightly below average, as you’d expect from a highly-rated company whose share price has risen by 145% over the last five years — nearly three times the gain delivered by the FTSE.

However, SABMiller’s capex has declined over the last few years, and the firm’s free cash flow has remained ahead of its dividend payout, despite average dividend growth of 11.7% per year since 2008.

On the face of it, this is a successful, well-run company, in a strong financial position.

Is SABMiller a buy?

SABMiller, along with its liquor-focused peer Diageo, has been on my watch list for a long time, but as a value-focused income investor, I’ve never been able to persuade myself to accept its premium price tag.

My view has always been that SABMiller’s earnings growth will gradually slow, leaving the firm’s shares on a more affordable P/E rating, and with a higher dividend yield. That process seems to be underway — SABMiller shares are down by 25% on their 52-week high of 3,683p, and the firm’s P/E rating is now broadly in-line with the FTSE average.

SABMiller is a great company, and the price is beginning to look good, too.

One for my retirement fund?

SABMiller's solid record of earnings and free cash flow growth suggests that its dividend is a pretty safe bet. Indeed, current forecasts suggest that it will rise by 8.6% in 2014, and by 7.7% in 2015.

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> Roland does not own shares in any of the companies mentioned in this article.