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Why Fevertree Drinks plc could be a dividend stock with millionaire-maker potential

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Shares in Fevertree Drinks (LSE: FEVR) have smashed the broader market over the past three years. Since hitting the market, the stock has gained 1,111%, and as the group’s products continue to fly off the shelves, I believe there are almost certainly more gains ahead for investors.

Indeed, only a few days ago the company reported that full-year results would be materially ahead of current market expectations as it dominates the market. Management stated in the release: “The exceptional performance in the UK, the group’s largest market, has been particularly impressive with the rate of sales growth and momentum strong across both the on and off trade. The mixer category is now the fastest growing category across the UK soft drinks sector with Fevertree responsible for 97% of the value growth in retail over the last 12 months.

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City analysts had been expecting the company to report full-year earnings per share growth of 42% this year, followed by an increase of 10% next year. It now looks as if these figures are conservative. 

However, despite the company’s explosive earnings and share price growth, the one thing Fevertree lacks is income. The shares currently support a dividend yield of 0.4%, far below the market average of around 3.6%. 

I believe that this could change in the years ahead. 

Too much cash 

Fevertree has a problem that we’d all like to have, the company has too much cash. 

Last year the firm reported a cash flow from operations of £21m but spent only £800k on capital investments. The same trend occurred in 2015.  Cash flow from operations was £10m with capital spending of only £400k. This year it is on track to report £38m of cash generated from operations, but capital spending is set to come in at less than £1m. 

At the end of the first half, the firm reported a cash balance of £47m, with debt of only £6m for a net cash balance of £41m. Considering the current rate of cash generation, I believe that the cash balance will have expanded to around £60m by the end of 2017. 

Returning cash to investors 

Fevertree is piling up the money, and with investment opportunities limited, the company may have no choice but to hike its dividend to investors. 

This year, I estimate that the company will pay £11m in dividends to investors against a free cash flow of nearly £40m. Based on these numbers, Fevertree could double its payout this year quite comfortably with plenty of room left over for investment in expansion. 

And as the company continues to expand, the payout could grow exponentially. For the past two years, free cash flow has doubled every year. If this continues, next year the firm could produce around £70m in cash from operations, giving scope to hike the payout seven-fold to just over 60p per share for a yield of 2.9%. 

All in all, as Fevertree continues to expand and throw off cash, it looks as if investors will be well rewarded with both income and additional capital growth. 

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Rupert Hargreaves owns no stock mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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