Five funds investing in companies with pricing power
I don’t know about you, but it feels like my monthly wage just isn’t going as far as it used to. And...
According to The Good Pub Guide, the price of a pint of beer in the UK has increased by 10p in the last year to an average of £3.79. London is the most expensive place to grab a quick pint, where the average price is £5.18*, followed by Brighton and Hove (£4.53*). The cheapest place is Preston, where it will set you back a far more reasonable £3.06*, and Perth a close second where it’s £3.07*.
But this 10p rise is nothing in comparison to the increase abroad, where holidaying Brits have seen the price of beer increase by around 16% – or the equivalent of 49p – in the past three years since the EU referendum.
Caxton, the foreign exchange company that has created the ‘Brexit Beer Index’, says that across all countries, the cost of beer has gone up from the equivalent of £3.12 to £3.61 based on exchange rate difference alone.
These rising prices had me wondering: how can I invest in my favourite tipple to offset some of the pain of getting a round in at the pub? You might be surprised by how many opportunities there are…
The managers of the Morgan Stanley fund told us: “We initially purchased Heineken back in the first quarter of 2018. Our thesis was that Heineken is a vastly improved company under CEO van Boxmeer. It has become more balanced by both brand and geography, and is no longer so dependent on the Heineken brand and the declining Western European market. It now has enough investment in marketing, with spend at all-time highs as a percentage of sales. Culturally, it is now a genuinely global company, rather than a collection of country fiefdoms.”
Congest co-manager Alistair Wittet added: “We like the company’s focus on premium beer which continues to outgrow the beer category overall, while we see more immediately an opportunity to capture market share against an over-indebted and cost-focused competitor in Ab InBev.”
Speaking of Ab InBev – Anheuser-Busch InBev (which is its full name), is a global beer business that recently cut its dividend. But this hasn’t put off Carl Stick, manager of Rathbone Income fund.
In a recent video interview, Carl told us: “We had a small holding in the company. Investors have been worried about the high level of its debt, but the management were more relaxed. They decided they were not being rewarded for paying a high dividend to shareholders, so instead decided to cut the dividend and pay down some of the money owed. To me this makes it a much more attractive business today and I welcomed the move. I have since topped up the holding, as the dividend growth potential from here looks more promising.”
If beer isn’t your drink of choice, Pernod Ricard is another popular option with fund managers. Held by RWC Continental European Equity and Threadneedle European Select, it owns brands such as Beefeater gin, Absolut vodka, Malibu and Mumm Champagne.
David Dudding, manager of the Threadneedle fund said: “Pernod Ricard has significant exposure to India and China, which should contribute most of the growth in the luxury spirits going forward. It’s a leading player in a consolidated cognac market, through Martell, has high barriers to entry, good cash flow and a good balance sheet, which could allow for share buybacks and bolt-on acquisitions.”
Diageo is also a firm favourite of professional investors and is a holding in AXA Framlington UK Select Opportunities, Investec UK Alpha and Smith & Williamson Enterprise. It’s website says it is “A brand for every taste and celebration, big and small” and its line-up includes Guinness, Baileys, Johnny Walker and Captain Morgan.
The managers of the Smith & Williamson fund told us: “Diageo is a stable compounder that has generated consistent top-line growth, margin expansion and growing cashflows, with a focus on value creation for shareholders. Its guidance appears conservative and the recent share buyback provides a further catalyst for the shares. On top of that, we would expect it to be relatively resilient in the event of a messy no-deal Brexit.”
Brown-Forman is best known for its bourbon whiskey Jack Daniels and has a great heritage, according to Torcail Stewart, co-manager of Baillie Gifford Strategic Bond, who owns one of the company’s bonds in his portfolio. “The firm has been owned and managed by the Brown family since 1870,” he said. “ They have proved to be excellent long-term stewards of capital, running the business with low levels of debt, whilst successfully expanding beyond the US to create a global beverage brand. We lend to Brown-Forman, because it is a high quality growth company that manages its balance sheet in a conservative manner. The A rated [investment grade] Brown-Forman bonds therefore fulfil a defensive function within our Strategic Bond fund, as they offer a resilient and dependable income stream to our clients.”
What about the pubs themselves? Greene King, one of the UK’s leading pub retailers and brewer, and a long-standing holding in City of London Investment Trust, was the subject of a takeover bid recently, and rose 45% over the month of July on the news it was being bought by CK Asset of Hong Kong.
The City Pub Group is a holding in Marlborough UK Micro-Cap Growth. It owns and operates individually branded premium pubs in Southern England. The fund’s investment team told us: “There are a number of factors that have drawn us to the company, namely the freehold property portfolio, the strong pipeline of potential deals and the central buying power of the wider Group, which should enable more efficient operation of individually acquired pubs. While the sector has faced headwinds in recent years with cost inflation, we believe well-managed and premium operators are well placed to continue growing through both like-for-like sales through their differentiated offering to consumers, and by acquiring, refurbishing and improving new sites.”
Finally, Amcor is an Australian packaging company that makes (among many other things) the small bottles commonly used for drinks on aeroplanes. It has also recently designed Brazilian beverage maker New Age’s Salzburg craft beer bottles. The new PET [polyethylene terephthalate] bottles are 100% recyclable, lightweight and shatter-proof and should reduce transportation costs, energy and CO2 emissions along the supply chain.
It’s also one of the biggest holdings in M&G Global Dividend. Stuart Rhodes, manager of the fund commented: “Amcor serves a stable customer base of consumer goods and healthcare businesses. The company has global scale and is making strides to provide innovative, as well as sustainable solutions to address circularity, reduce waste and recycle content.”
*Source: www.finder.com, International pint price map. Methodology: based on data from cost-of-living sites Expatistan and Numbeo as of 29th July 2019. The majority of values were averaged from the two sites. In the few cases this was not possible, data from Numbeo or Expatistan was used alone.