Brewing giant SABMiller (LSE: SAB) has powered ahead of the market since 2009, delivering a 188% gain over the last five years, compared to just 64% for the FTSE 100.
However, there are signs that the brewer’s growth is coming under pressure, with both sales and earnings growth slowing, and currency headwinds denting profits. Is SABMiller still a safe hold, or could the firm’s dividend come under pressure?
I’ve taken a closer look at SABMiller’s finances to find out more.
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1. Interest cover
What we’re looking for here is a ratio of at least 2, to show that SABMiller’s earnings cover its interest payments with room to spare:
$4,317m / $733m = 5.9 times cover
SABMiller’s earnings have covered its interest payments 5.9 times over the last twelve months. I’d rate this as a comfortable margin of safety, although it’s worth noting that many FTSE 100 firms have far higher levels of interest cover.
2. Gearing
Gearing is simply the ratio of debt to shareholder equity, or book value. I tend to use net debt, as companies often maintain large cash balances that can be used to reduce debt if necessary.
In its half-year results, SABMiller reported net debt of $16,413m and equity of $26,422m, giving net gearing of 62%. This is well below danger levels, although it is higher than my preferred limit of 50%, and could become costly to service if interest rates rise.
3. Operating margin
SABMiller’s operating margin over the last 12 months was 18.8%, highlighting the pricing power provided by the firm’s portfolio of beer brands, which includes Miller and Peroni.
However, SABMiller’s fourth quarter trading statement hinted that the firm’s profits may have come under pressure during the final quarter of the year. Alan Clark, SABMiller’s chief executive, said that the fourth quarter had been “challenging” and the group had faced a “number of headwinds” during the year.
Is SABMiller a safe buy?
SAB’s dividend was covered by free cash flow 2.3 times last year, and I believe it will continue to grow ahead of inflation for several more years, even if SABMiller’s earnings growth slows.
However, SABMiller shares currently trade on a forecast P/E of 22 and offer a prospective yield of just 2.1% — a valuation that is too strong for me to rate the shares as a buy.
