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The Contrary Investment Case: 3 Reasons To Ditch SABMiller plc

sab.millerIn recent days I have looked at why I believe SABMiller (LSE: SAB) (NASDAQOTH:SBMRY.US) is poised to smash its way higher (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors which could, in fact, push SABMiller’s share price to the downside.

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The West goes south

SABMiller’s continued strength in emerging markets across the globe is of course a fantastic omen for future growth rates. However, a backcloth of lasting revenues weakness in its established geographies remains a gargantuan thorn in the side for the firm.

Most notably, sales continue to weaken in Europe owing to enduring pressure on customers’ wallets and intensifying competition, and the brewer saw organic net producer revenues from this region — responsible for 18% of group turnover — erode 6% during September-December.

Meanwhile performance in North America also continues to drag, with growth of just 1% punched during the three months. Sales here also account for 18% of the group total.

Escalating legislation crimps sales outlook

Like those within the tobacco industry, the world’s largest distillers and breweries are facing the prospect of rising legislation across developing regions intended to curb consumer purchases.

Grant Harries, President of SABMiller’s Bavaria subsidiary in Colombia, told just last month that sales in the country have come under fierce pressure following harsher drink-driving legislation drawn up in December.

This follows moves in recent months in Russia to ban the sale of alcohol in and around sports stadia, representing something of a sea change for the vodka-loving country. Indeed, evolving attitudes to smoking and drinking in these new geographies could prove an escalating growth problem for the likes of SABMiller.

A below-par dividend pick

A backdrop of steady earnings growth in recent years has enabled SABMiller to consistently lift the full-year dividend, the company having raised the total payout at a staggering compound annual growth rate of 14.9% since 2009.

And with earnings expected to continue rolling higher during the next few years, City brokers expect the firm to lift the dividend 8.6% for the year concluding March 2014 to 109.7 US cents per share, before initiating advances of 8.7% and 9.7% in 2015 and 2016 respectively to 119.2 cents and 130.7 cents.

These growth rates are undoubtedly impressive and bode well for future payout rates. But for investors seeking chunky returns in the short-to-medium-term SABMiller falls short — a yield of 2.2% for this year lags the current forward average of 3.1% for the FTSE 100, as do readings of 2.4% and 2.7% for each of the next two years.

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> Royston does not own shares in SABMiller.