Smart Investor: does SABMiller pass muster?

With an impressive profitability track record, satisfactory return on equity, very moderate debt levels and a substantial economic moat, SABMiller looks like a contender for Smart Investor's seal of approval, at the right price.

Leaving emotions at the door

On many occasions in the past I have stated that investing is best done when emotions are not a part of the decision-making process.

When asked about companies and the products they offer, I often know very little about them from a consumer’s perspective. Although considered a negative by some people, it actually helps me to keep emotions to one side because I have no bias towards or away from any particular company.

Therefore, as someone who enjoys little more than a very occasional glass of wine, I have no prior view on SABMiller (SAB.L) and its products. The figures (and not emotions) will help me to decide if it merits investment while the FTSE 100 draws ever closer to 6,000.

A giant among brewers

SABMiller is one of the world’s largest brewers, with more than 200 beer brands and 70,000 employees in 75 countries.

It can trace its roots back as far as 1895 with the launch of Castle Lager in South Africa, and today’s SABMiller was formed with the acquisition of Miller Brewing company by SAB plc in 2002, which created the second largest brewer (by volume) in the world.

With a market capitalisation of £40.8 billion, SABMiller is currently the 12th biggest company on the FTSE 100.

Performance

‘Consistent’ perhaps best describes the company’s performance over the past five years. Net profit has grown at an annualised rate of 8% over the period, from £1.063 billion in 2007 to £1.553 billion in 2011 (all figures use an exchange rate of £1 = $1.55).

While net profit growth is impressive, return on equity (ROE) is only acceptable, averaging 11.7% over the period and hitting 11.5% last year.

Dividends, meanwhile, are disappointing, with the shares currently yielding just 2% from a payout ratio of 53.3%. In addition, SABMiller has invested heavily in capital expenditure over the past five years, meaning free cash flow averages £796 million versus an average net profit of £1.273 billion.

Lack of debt

However, analysis of the company’s balance sheet reveals that borrowings are minimal, with SABMiller having a debt to equity ratio of just 38%, which is very moderate and improves the standing of the aforementioned ROE figure. Furthermore, interest coverage of 5.9 is adequate and shows that the company has ample headroom when servicing its debts.

In terms of an economic moat, SABMiller’s strength lies in its brands and capacity. Sure, other companies can produce beer and compete, but the company undoubtedly enjoys a substantial degree of brand loyalty and a new entrant or current competitor would find it difficult to convince SABMiller’s customers to desert their favourite beers in the short to medium term.