Greene King pumps divi

Trading remains tough for consumer-facing companies generally, with rising unemployment meaning a recovery looks some way off. Yet in the UK pubs industry, a clear divide seems to be emerging between likely winners and losers. We've already suggested selling shares in Enterprise Inns and Punch Taverns - but we would put Greene King firmly on the winning side.

One key reason for this is its dividend. While tenanted rivals have been cutting payouts to concentrate on paying down debt, Greene King should be able to maintain its payout, which at the current share price equates to a five per cent yield. Yes, net debt is still high at about £1.4bn, but following a £207m rights issue in May, the group's finances are under control, and it has taken advantage of weakness in the credit markets to buy back its own debt at large discounts to redemption value. It's also capitalised on the weakness of rivals by buying pubs from them at bargain prices.

Trading stability is also adding to confidence, even though some risks remain. The key area of concern has been Greene King's tenanted pubs, which last year accounted for 28 per cent of cash profits. These pubs find it hard to compete with pubs managed by big groups, which can offer better value-for-money deals. Last year Greene King had to offer its tenants £4m-worth of support and, in the first 16 weeks of this financial year, cash profits per pub were off 7.2 per cent. However, management is being flexible with its troubled tenants and appears to be having some success with its initiatives to help them improve trading. What's more, the progressive attitude towards tenant relationships means the group looks less in danger of being hurt as a result of the Office of Fair Trading's investigation into the so called tenant "beer tie" triggered by a complaint from the Campaign for Real Ale.

Besides, most of Greene King's pubs are managed. Half of cash profits are generated from its core retail business and, as with other managed-pub operators, the hands-on approach has proved to be of real benefit during a downturn. The group has driven sales with cut-price deals and has seen strong growth at its Hungry Horse eateries, with like-for-like sales up 4.6 per cent in the first 17 weeks of the year. And, perhaps just as importantly with regard to the long-term battle to keep hard-pressed customers turning up at their local, the group has maintained its investment in its estate despite the pressure it has felt on profit margins.

Trends in the market for real ale are also underlining the attractions of Greene King's pubs, which tend to be associated with cask ale given its brewing heritage. After many years being seen as a drink for old men in flat caps, real ale is making a sustained come back. Not only has the proportion of cask-ale sales in pubs risen from 11 per cent in 2007 to 13.5 per cent in the first half of 2009, but the number of women drinking real ale has doubled over the past year, which is a real break with the past. The trend also supports Greene King's brewing business, which has been aggressively growing its market share. That said, brewing only accounted for 9 per cent of cash profits last year.

Greene King's Belhaven business - a kind of mini-Greene King based in Scotland - faces many of the pressures of the rest of the group. In addition, management is concerned that pressures on public-sector spending will hit Belhaven hard as Scotland's economy depends on the public sector more than England's. So far, however, Belhaven has been going great guns as it drives through increased food sales in its pubs.