BUY: Britvic (BVIC)--Taking a Sip of a Soft Drinks Giant

Price: 747.32p
Shares: 100
Predicted annual dividend income: £20.90

"Buy what you know", they say.

It is sound advice. After all, if you consume the products a company produces yourself you will have a better grasp of how other customers feel about the stuff they churn out the factory. If you like it, it is quite likely so do others.

That is why FTSE 250 soft drinks giant, Britvic (LON:BVIC), has been on my radar for some time.

Their drink brands abound everywhere.

Indeed, as I write I am sipping on a glass of R Whites Lemonade. And this weekend me and Miss DD were enjoying a little J2O together during whilst out and about.

Similarly, I am probably not the only one (especially in the UK) to admit I have a cupboard stocked full with Robinsons squash. We usually have at least two different flavours on the go at any one time (fruit and barley, usually).

As such, investing in them myself certainly seems logical. I know their drinks. I like their drinks. I buy their drinks. As do others around me.

So I finally overcame my reservations (more on this later) and pitched some of my cash in Britvic's direction. Let's see why here.

Britvic 101

First, let's look at Britvic a little more away from the numbers. Their brands are truly huge. Indeed, until I first started looking at them seriously I did not realise the scope of the drinks they produced Their own brands include (not counting the ones I mentioned above):

• Robinsons Fruit Shoot
• Tango
• Drench Juicy Spring Water
• Ballygowan Still Mineral Water
• MiWadi
• Shandy Bass
• Red Devil Energy Drink
• Britvic 55

In addition, they also have exclusive right to produce and sell PepsiCo brands in the UK. This includes: 

• Pepsi
• 7Up
• Mountain Dew
• SoBe
• Gatorade

All told, therefore, they have a very wide variety of soft drinks on the market. 

It must be said that their geographical diversification is somewhat limited currently. The UK is their chief market with Ireland and France chasing up close behind. 

However, they have been focusing on building the international exposure of their own brands through franchise agreements (for example, in the US and India). This seems a sound strategy to me and hopefully will underline their growth story going forward.

All in all, I like the look of a company from this perspective.

Good Value Consumer Goods?

As most of us realise early on in our investing lives. Consumer goods companies are particularly sought after for their consistent growth and income attributes. As a result, they tend to attract pretty substantial premiums to the market. 

Unilever, Diageo, PZ Cussons, Reckitt Benckiser, SABMiller and more besides all hold P/E values of over 20 for next year. Indeed, even smaller soft drinks companies like A. G. Barr and Nichols--which are, perhaps, better comparisons with Britvic--have P/E values in that region as well.

So what about Britvic? Let's take a look for this year:

		EPS	P/E Ratio
Consensus		45.89	16.29
High		47	15.90
Low		45.2	16.53
Difference (%)		3.95

This is a pretty tight set of predictions from the analysts. even assuming the lowest EPS predictions for the year we should see a P/E around 16.5. That is a significant discount to Britvic's peers.

What is more, it marks a significant predicted EPS growth across the board with the lowest PEG value sitting at 1.85. This all looks good to me.

And for next year?

		EPS	P/E Ratio
Consensus		49.85	14.99
High		52.24	14.31
Low		48.52	15.40
Difference (%)		7.54

Again another tight set of predictions (only 7.5% difference) and again the lowest predictions not only offer a P/E value of 15.4 but a PEG of 2.1. Again, this looks good to me.

Dividends

So what about the dividend front? First, they have a very good record indeed. Britvic was only listed again in 2006. Since then, the dividend has grown from 10p per share to 20.9p per share in 2014.

Only once in that time were they forced to hold the dividend. This was in 2012 when it was held at 17.7p per share. 

This was chiefly due to the issues surrounding the Fruit Shoot bottle caps which meant they had to recall many bottles of the tipple in July that year.

However, since then dividend growth has been back to business as usual. Analysts currently predict a dividend of 22.73p and 24.61p per share for this year and next. 

This would offer a yield of 3.04% and 3.29%. As a result, Britvic is set to yield investors a nice amount more than any of the other companies listed above. Not bad at all.

What is more, they are predicted to be covered over twice by earnings in both years. Overall, looks very good indeed.

Elephant in the Room?

So where is the catch? 

Well, the only issue which prevented me investing last year (when it was trading about 650p per share) is related to its debt load.

According to its annual report it has a debt of £566 million. This is quite hefty for a company with a market cap of about £1.8 billion and throws out a debt to equity ratio of about 6. This is well above the usual fare for such companies (who often have debt to equity ratios well below 1).

That is quite large. Bear in mind that utilities--which tend to have large debt loads due to infrastructure investments and their excellent ability to service those debts--have much lower readings (see my SSE and National Grid purchases, for example).

Why I Am Not So Worried

However, I have looked into this a lot more before investing. First, the debt has been used on investments which seem to be resulting in the higher growth rate. As a result, its seems the debt seems to be achieving what it intended: enhancing growth.

Also, they have been slowly reducing their debt exposure (and have intentions to continue to do so). They also have quite a large cash pile--£143 million--which easily covers the interest repayments (which were £26 million last year). This is not to mention that their operating profit covers the interest repayments over 6 times as well. This is all encouraging.

Of course, I would prefer to see this debt level drop and expect to see that occur in the coming years. 

Nonetheless, my further research satisfied me that the debt level is manageable and positively reflects Britvic's recent acquisitions which are contributing positively to their growth.

Britvic and My Goals

So how does Britvic fit into my investing goals for the year?

With a yield of about 3% it will draw me a little further from my target of retaining a portfolio yield of 4% or more. However, that particular goal is in the process of being reviewed. 

What is more, as I have recently been looking to bulk up the high growth rather than high yield portion of my portfolio (see, for instance, my recent WPP purchase). Britvic serves this purpose very well indeed being a nice compromise between yield and growth and being in the solid, consumer goods sector.

My £800 dividend income target for the year will be helped a little by this purchase. However, not as much as I may have hoped. Britvic pay their final dividend in February and so I missed that payment for this year. 

I will, therefore, only receive the interim payment for the 2015 calendar year. But this is not bad and should add about £7 to my total. Not bad, but next year I will see both the Interim and Final dividends dropping into my brokerage account.

Being a consumer goods company it does represent a less volatile investment. It has a beta of just 0.74 which should help keep me on track to retaining a portfolio beta of 0.85 or less. 

What is more, being a larger purchase than my usual investments for last year, I am on track to hit my goal of keeping investing expenses to below 1.3% for 2015. For this purchase the brokerage and fees represented just 1.17% of my total investment. Not bad at all.

Being a new holding. It also means my portfolio has now got up to 28 different companies in total. This is edging towards my original goal of keeping it under 30 companies this year. 

This goal has always been rather flexible and was included in order to encourage me to think about topping up on current holdings rather than just focusing on new additions. It is, still, something to watch!

Overall, I am very happy with my Britvic purchase. I will remain sensitive to any movements in their debt levels and the cost of servicing those debts, however.

What do you think?

What do you think about Britvic as an investment? Would you be worried about its debt levels? Are there better consumer goods investments out there for growth and income?

Like what you have read?
Sign up to receive FREE email updates when new content is published:

---

Why not also follow me on Twitter and like me on Facebook?

---

[Creative Commons image reproduced from Flickr user chry5ta1]