There are a few reasons why retail investors might like Marston’s. It could be for the 20% discount on food and lodging. More likely, it’s for the chunky dividend.
Marston’s, which owns breweries and 1,600 pubs across the UK, paid out £47.5m last year — a yield of 5.7%. It makes the company an attractive stock — as long as it remains committed to the shareholder payout.
That is where it could become tricky: Marston’s has a lot of debt. Last year’s annual report said it was committed to paying down £200m of its £1.4bn net debt by 2023. However, in July, chief executive Ralph Findlay, who has been in the role since 2001, announced he was deferring plans to build new pubs to speed up the debt repayment — probably after feedback about investor concern over the growing liability. He also said he would keep the dividend steady until 2023.
The shares fell by 12%, languishing for several weeks until rival Greene King accepted a £2.7bn (£4.7bn including debt) offer from Hong Kong tycoon Li Ka-shing. The deal marked the second time this year a British brewer had been snapped up by an Asian buyer, after Fuller’s was sold to Japanese drinks giant Asahi for £250m.
Marston’s shares have climbed 26% since the Greene King deal, closing last week at 130.8p, valuing the company at £829.3m. It remains to be seen whether an offer for Marston’s will materialise; industry insiders suggest that rival Mitchells & Butlers would be a more attractive target.
Marston’s is understood to have appointed advisers from Christie & Co to sell off 150 tail-end pubs for about £45m, in a process dubbed Project Harvest — part of its mission to pay down the debt. Initial bids were due on Friday, but the deadline has been pushed back until the end of this week.
This year has been tough for small pub deals, as Marston’s knows all too well. It called off the sale of its Pitcher & Piano business in the past few weeks.
Elsewhere, Marston’s is employing some flattering accounting. It reported underlying pre-tax profit of £104m for last year, up 3.9% on 2017. However, that did not account for £7.3m of “reorganisation and integration costs”, which it said related to its acquisition of the Charles Wells brewing business in 2017. While it could argue these costs are a one-off, they have become a feature of the accounts: it had £5.5m of them in 2017 and £3.8m in 2016.
Marston’s is a good dividend stock, for now. Yet its shares are still trading on the Greene King premium, and tackling the debt pile is going to be some feat. Avoid.
