As Brexit and Westminister politics continue to dominate the headlines, I’d like to discuss the outlook for Britvic (LSE: BVIC), a leading producer of soft drinks, and Dunelm Group (LSE: DNLM), the furniture and homewares retailer.
I regard both of them as defensive shares with robust growth prospects that may deserve a place in a diversified portfolio.
Power of brands
Most of us are familiar with Britvic’s products, including Robinsons, Tango, Fruit Shoot, and J2O. The company also has exclusive rights to make and distribute PepsiCo‘s global brands in the UK.
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I’ve got to underline the importance of these brand names: they provide the group with a loyal customer base and pricing power. Currently, the company is the largest supplier of branded still soft drinks in the UK, as well as the number two supplier of branded carbonated soft drinks domestically.
Over the past decade, it has delivered impressive long-term shareholder returns, rising from 200p to a recent high of 923p. Analysts credit this success in part with management’s ability to innovate and offer different products for various groups of consumers, such as the 18-24-year-olds, the under-35s, as well as the over-50s.
In late November, the company reported a 5% increase in revenues and increased its dividend, giving investors a 3.3% yield. BVIC’s bottom line has so far not been affected by the UK government’s recent sugar tax as many consumers have either continued to purchase their preferred brands or have moved to lower sugar alternatives offered by Britvic.
The P/E ratio stands at 20 for now. I expect the company to continue to grow and increase earnings in years to come, both domestically and in several markets overseas. Through franchising, export sales and licensing, the group has been increasing its reach globally, including sizeable operations in Ireland, France and Brazil. Therefore I am comfortable with this P/E ratio.
Multi-channel retailer
It is no secret that the UK retail sector had a difficult 2018 and many analysts are still cautious about buying many retailer shares. However, Dunelm is one stock I am happy to take a closer look at.
Since the opening of the first Dunelm store in 1991, the company has expanded operations. It now trades through a network of over 170 stores across the UK, most of which are superstores based in out-of-town locations. Also, about one-fifth of its sales come online from different websites, including www.dunelm.com, www.worldstores.co.uk, www.kiddicare.com, and www.achica.com.
On 13 February, the group released its interim results when it reported a sales increase of 6.9% as well as a 5% growth in customer base. Investors were especially encouraged by the 35.8% growth in online sales. The company cited “strong autumn traffic growth, improved brand traffic and a pick-up in Google Trends data”.
Analysts have also highlighted that the management has been decreasing costs and adding to the bottom line. As a result of all the positive developments, Dunelm posted a 24% rise in first-half pre-tax profits.
In addition to growing profits, the dividend yield of 3.4% makes the group a worthwhile pick for risk-averse income investors who know that they can compound their returns through reinvesting dividends.
The bottom line
Both Britvic and Dunelm are fundamentally sound companies with growth prospects, leadership in their respective markets, and proactive management – factors that are likely to translate into a strong balance sheet and robust bottom line in 2019.
