Dividend a big plus for Guinness

Safe haven? The strong interest in BAT (RM39) recently caught our attention. The share price has risen 11% in the past one month to a record high, after consolidating at the RM35 level for almost two years. Amid the ongoing war tension, it is indeed understandable that BAT is sought for its resilience and its dividend appeal. 

Good timing for Guinness. If BAT, which offers single-digit earnings growth and 5.5% net dividend yield can be re-rated in the prevailing market, we feel that Guinness, (RM3.64) which offers all the defensive qualities and even higher dividend yield of 7.7% also stands a good chance.  

Among the consumer stocks in Surf88’s coverage, Guinness provides the highest dividend yield. Further, investors need not wait too long as Guinness went ex on Wednesday, for a net interim dividend of 9.36 sen per share.  

This alone yields 2.6%, and will be paid just about on May 9. This would be the first of three expected dividends from Guinness in the current June 2003 financial year. 

Three dividends yielding 7.7% on net basis. As depicted in the table below, Guinness has consistently paid 8.64 sen per share in net interim dividend between the June 2000 and June 2002 financial years, before raising payout by 8% to 9.36 sen per share in Jun 2003.  

With limited capital expenditure needs, management is in favour of continuing the high dividend yield policy. As of end-2002, Guinness had around 30 sen net cash per share (zero borrowings). 

Even just assuming similar final and special dividends as with previous years, full-year net yield of 7.7% would already be way above cash returns.  

While the final dividend is expected to be declared in August together with the final results (as with the past), the timing of the special dividend is less certain.  

In the June 2001 financial year, Guinness declared the special dividend with the final results in August 2001, whereas in the June 2002 financial year, the announcement came with the third-quarter results in May 2002. 

Competitive business environment. In terms of operations, Guinness faces marginal sales growth, keen competition and high taxes (and risks of further increases), which is not unlike BAT.  

Meanwhile, we see the higher demand elasticity for beer as balanced by the more manageable situation in terms of smuggling. 

As background, Guinness controls almost half the malt liquor market in Malaysia.  

Beer accounts for nearly 70% of its volume, and the balance from stout in which it has a pole position.  

Of its portfolio of three major brands, Heineken targets at the premium segment, Tiger Beer at young drinkers and Anchor Beer at more mature consumers.  

While competition has risen as demand slows, it was of comfort that Guinness was not as aggressive in terms of discounting in the Chinese New Year just past. 

As with its cigarette counterparts, breweries have significantly stepped up cost efforts in recent years, which should help profit amid slow demand growth.  

Overall, we expect Guinness to clock in 7% pre-tax growth in the June 2003 financial year, which translates to flattish earnings per share after incorporating the normalisation of tax rate. 

Based on estimated Jun 2003 earnings, Guinness trades at 15 times price-earnings ratio.  

Upgrade to BUY. For investors seeking high dividend yield, good management, as well as operational and share price resilience, Guinness would be a good choice. Looking at its share price performance last year, Guinness traded between a low of RM3.32 in July and RM3.78 in October. 

So far this year, the stock has continued to trade within this band.  

True that this may not be the best pick in terms of capital appreciation potential, but in uncertain times like the prevailing, Guinness indeed provides a safe haven.  

This underpins our recommendation upgrade from HOLD to BUY, especially for dividend-yield seekers. 


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