I’ve been eyeing up a FTSE 250 stock that I think could get a boost if Prime Minister Liz Truss repeals the sugar tax.
Soft drinks giant Britvic (LSE:BVIC) – which owns Robinsons, Tango, and J20 – looks well positioned to reap the benefits of a rumoured move to axe the tax.
The ‘Soft Drinks Industry Levy’ of 2018 imposes a tax of 18p a litre on drinks with eight grams of sugar per 100ml. An even steeper tariff of 24p a litre applies to drinks containing over eight grams of sugar per 100ml.
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Although the policy is popular with public health groups, the new PM believes the sugar tax is an illiberal overreach.
A sweet deal
Britvic is a relatively small fish in the big pond of the soft drinks sector, with its £2bn market cap making it about one-hundredth the size of Coca-Cola or Pepsi.
Still, with more than two-thirds of its revenue coming from the UK in 2021, it looks well positioned to get a boost from the end of the sugar tax.
And with a price-to-earnings (P/E) ratio of 18, Britvic seems better value than Pepsi and Coca-Cola, with P/E ratios of 25 and 27, respectively.
Britvic’s 2022 interim results struck a chirpy tone, with out-of-home sales moving back towards pre-pandemic levels.
It also announced a £75m share buyback programme for the 12-month period from May 2022.
In addition, its dividend yield of 3.33% is not to be sniffed at. The drinks juggernaut has a strong record of dividend growth, having nearly tripled its payout between 2007 to 2019 from 11p to 30p a share.
However, the pandemic interrupted this impressive streak of year-on-year increases, bringing the dividend crashing down to 22p.
Bubble trouble
Britvic is facing an important headwind though -– and it’s a gassy one. The price of carbon dioxide — used to make drinks fizzy — has skyrocketed from £250 to £2,800 per metric tonne.
That supply shock is due to companies closing industrial chemical plants as gas prices soar.
This isn’t the first time a CO2 shortage has gripped the UK. In 2018, the government stepped in with £50m of state aid to get US company CF Industries to reopen a fertiliser plant that spews out CO2 as a by-product.
Unfortunately, 60% of the UK’s CO2 supply comes from just two fertiliser factories.
If the UK government could kick the fizzy can down the road last time with just £50m, I suspect it will do so again. After all, CO2 is essential to many industries, including breweries, food packaging, vaccine transportation and even in abattoirs as an anaesthetic.
However, I don’t want to be holding shares in a carbonated drinks manufacturer like Britvic while the crisis is still evolving.
What’s more, Liz Truss faces stiff opposition to any sugar tax repeal, with Whitehall sources telling The Guardian last week that there are “legal and parliamentary procedural obstacles”.
To me, Britvic looks like a solid consumer staples company, much like Coca-Cola and Pepsi, yet at a more reasonable price.
But until the CO2 shortage ends, I’ll be a passive bystander on the sidelines – possibly sipping a not-so-fizzy Tango while I wait.
