At the time of writing, the best interest rate available on a Cash ISA is just 1.5%. This dismal rate of interest doesn’t even match the current rate of inflation, meaning the purchasing power of any money deposited will decline steadily over time.
With this being the case, I’m on the hunt for income stocks that might offer a better place to invest your money in the current interest rate environment. One of the companies I believe could be an attractive addition to your portfolio is pub group Marston’s (LSE: MARS).
Slow and steady
Marston’s might not have the appeal of a hot tech stock, but over the past few decades (the company went public in 1986) the business has proven it can produce steady, attractive returns for investors.
During the past 10 years, the stock has returned 8% per annum, including dividends, turning every £1,000 invested into £2,160. If you’d deposited the same amount of money in a Cash ISA, your £1,000 investment would be worth just £1,160 today.
So, what does the future hold for this enterprise? Well, despite Brexit uncertainty, the UK consumer still seems happy to spend money in Marston’s establishments.
According to a trading update today, covering the 42 weeks to 20 July, like-for-like managed and franchised pub sales increased by 0.5%, although growth tailed off in the second half of the reported period due to the tough year-on-year comparison. Last year, the World Cup and an unusually hot summer helped push the group to a record performance.
Improving free cash flow
As well as growing the business, management is also focused on strengthening Marston’s balance sheet. In January, the company announced it would “reduce net debt by £200m in the period 2020 to 2023 through reduced capital expenditure, £120m of disposals and a reduction in interest and pension costs.” The new plan is to hit this target in a shorter time frame.
To this effect, Marston’s is putting £70m of capital spending on new pubs on ice, reinvesting the money into existing establishments, which “are generating significantly higher returns.” Management believes this new strategy will “generate an additional £40m to £50m of cash flow over the next three years.“
Lower capital spending and more cash flow is excellent news for shareholders. Marston’s already supports a dividend yield of 6.2%, and with free cash flow set to increase over the next few years, the company will have scope to hike its payout further. A stronger balance sheet is also a bonus.
The bottom line
It looks to me as if Marston’s is firing on all cylinders and powering ahead and, right now, you can snap up shares in this pub operator for just 8.6 times forward earnings.
This valuation makes the firm one of the cheapest pub companies listed in London right now, and I think it dramatically undervalues the firm. That’s why I’d put my money in Marston’s over a Cash ISA any day.
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Rupert Hargreaves owns no share 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.