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Applause? No, booze

The numbers from Greene King were the better received. While shares in Topps Tiles remain unchanged since the full-year figures, the price of Greene King's shares has bounced 8 per cent to 550p, the first useful upwards shift since September’s first-quarter trading update, which covered the effects of football’s World Cup and some glorious summer weather.

Maybe investors were waiting to see if the first quarter’s gains had faded away as trading returned to dull and normal. Not really. Greene King’s bosses say like-for-like sales in the group’s pubs company were 2.7 per cent up in the first half. That’s more than twice the national average for pubs and – as the table shows – better than the latest growth rates posted by other pubs operators, with the exception of JD Wetherspoon (JDW). True, those growth rates are not necessarily comparable. Even so, they give an idea of which operators are thriving – after a fashion – and which are struggling.

The pubs' operators compared
 Share price (p)Like-for-like sales (%)PE ratioDiv'd yield (%)Cash div coverProfit margin (%)Debt to equity (%)Debt to Ebitda
Greene King5502.711.76.01.316.61044.6
Marston's1011.310.17.90.415.81767.6
Mitchells & Butlers2730.610.9nilna13.51124.9
JD Wetherspoon1,1435.018.11.07.67.82673.6
Ei Group1841.211.5nilna38.61317.1
Source: S&P Capital IQ; ratios based on latest 12 months' data

 

From an income investor’s perspective, Marston’s (MARS) offers the best comparison with Greene King since none of the others is a high-yield stock. Neither Mitchells & Butlers (MAB) nor Ei Group (EIG) – the remnant of Enterprise Inns – pays a dividend, a situation not likely to change soon. Meanwhile, shares in Wetherspoon are so highly rated that, even if management decided to distribute half the group’s likely earnings, they wouldn’t qualify as high yield.

Between Greene King and Marston’s, I can only say I’m content that the income portfolio’s holding is in the maker of Old Speckled Hen and Abbot Ale as opposed to the brewer of Banks’s bitter and Marston’s Pedigree (lest we forget, both groups still own in-house breweries). The extra dividend yield on offer from Marston’s (see table) doesn’t seem worth the risk.

It’s not just that Greene King claims to be growing its underlying sales at twice the rate of its rival. Chiefly – and whatever the bosses of Marston’s protest – the company’s dividend looks much the more threatened of the two. In the year just ended, Marston’s generated just £20m of free cash flow – the money left over for shareholders after all claims have been met – yet paid out £48m in dividends.

True, that shortfall was made good by the sale of surplus properties, as it has been in each of the past five years. It will also help that Marston’s is committed to trimming its capital spending. The amount dipped 17 per cent to £163m in 2017-18 – although that’s still four times the rate of depreciation – and will drop another £30m in the current year. Combine that with maybe a £30m-a-year gain in cash from cutting pension fund contributions and the dividend will probably be wrung out again this year.

Even so, the impression remains that sustaining the payout is part of a process of self-immolation that Marston’s could not sustain through the next serious downturn in trading.

Greene King hardly presents a glowing contrast. Yet what we might now label its ‘immolation rate’ is much less than that of Marston’s. During the past five years, in only one – 2016-17 – did its free cash exceed dividends paid and cumulatively in those years it has paid £418-worth of dividends against £300m of free cash. So, like Marston’s, it has relied on selling fixed assets – of which, cumulatively, it has sold £420m-worth in the five years – although not to the same extent.

Meanwhile, there is no escaping the reality that pubs operators are businesses under continual pressure. After all, Greene King’s results were nothing to shout about – revenues, profits and EPS were all barely changed from a year earlier; at the operating level, profit margins were lower in all three of the group’s divisions, gross profits per pub were static and so on.

That may not change any time soon because, as Greene King’s bosses acknowledge, consumer confidence has dipped since the summer, but cost pressures haven’t. That’s a dull outlook for a business that – according to my valuation models – has a poor record of both raising employee productivity and turning accounting profits into cash. Sure, much of that is beyond management’s control. Greene King’s biggest shortcoming is that it operates in the wrong industry and it is scant consolation that much the same applies to almost any bricks-and-mortar business that relies on UK consumers. That’s why their shares offer those high dividend yields.