Last week, Britvic (LSE:BVIC) announced a renewed distribution deal with PepsiCo for the next 20 years. I have previously written about another stock that operates behind the scenes of the food & beverage industry that is set to potentially benefit significantly from this deal. However, the primary beneficiary is, of course, Britvic itself, a stock I think could be a good buy for income investors like me.
The opportunity for income investors
For those unfamiliar with the name, Britvic is a manufacturer and distributor of soft drinks. Its product portfolio contains some of the most popular brands in Europe — including J2O, Tango, Robinsons, Fruit Shoot and Teisseire.
Furthermore, as previously stated, it is also responsible for the packaging and distribution of PepsiCo products – including Pepsi, 7Up, Lipton Ice Tea and Mountain Dew.
The business relationship between the two industry giants started back in 1987 and is now set to continue until at least 2040.
The combined brand portfolio is so vast that if you walk down the drinks aisle of your local supermarket, a massive chunk of it consists of products either made or distributed by Britvic.
A huge threat to the soft drinks industry has been the sugar tax that has been put in place by government as a means to tackle obesity. Businesses like The Coca-Cola Company have had to compensate by either passing on the additional cost to customers or reducing portion sizes.
Britvic has had no such disruptions. The management team’s wise decision to replace sugar with natural sweeteners has made its manufactured products ‘healthier’ and cheaper for customers.
The impact of the Covid-19 pandemic has undoubtedly affected the company’s out-of-home revenue stream. However, this loss has been somewhat offset by a increase in at-home consumption.
Consequently, dividends have been temporarily deferred to ensure the firm retains its strong liquidity as the pandemic continues to develop.
|Free Cash Flow to Equity (£m)||142.6||112.5||103.9||79.9|
|Gross Dividends (£m)||79.8||74.2||71.3||65.8|
|Cash Flow to Dividend Ratio (%)||55.9||66.0||68.6||82.3|
Historically, stock has achieved a steady, reliable increase in profits primarily due to its expansion into international markets. But more important is the company’s ability to generate additional cash each year.
Free cash flow-to-equity (FCFE) – the amount of cash available to shareholders after all expenses, reinvestment, and debt are paid – increased by 78% since 2016. With more money to spare, dividend payments have seen an average 7% increase each year.
Comparing FCFE to the gross dividends also shows that management is being conservative with the amount being returned to shareholders. As such, the firm can invest in new products and facilities unrestricted, while simultaneously reducing the need for a potential dividend cut in the future.
The bottom line
The share price has fallen by nearly 22% over the past year as a result of the pandemic. However, business disruptions are only temporary, as is the pause on the historical 4% dividend yield.
Therefore, I think Britvic is currently being undervalued by the market and thus provides a potential buying opportunity for income investors like me, but value investors too.
Zaven Boyrazian does not own shares in Britvic. The Motley Fool UK has recommended Britvic. 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.