The best time to buy a stock is often when its share price has been struggling. I think this might be the case with A.G. Barr (LSE:BAG) at the moment.
Over the last five years, the stock has fallen by around 23%. But it looks to me as though there’s more going on than initially meets the eye.
Irn Bru
A.G. Barr is probably best known for Irn Bru. I don’t honestly know how to describe what flavour it is, but that’s part of the point – it’s a product that’s also a brand.
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It’s not strictly true that Coca-Cola is the top-selling soft drink everywhere but Scotland. But Irn Bru does indeed outcompete Warren Buffett’s beloved beverage company in its home market.
Furthermore, the brand has impressive growth potential. According to its latest trading update, soft drink sales are growing at 7.6% per year on an organic basis.
On top of this, the company is targeting inorganic growth as well. By acquiring other businesses to expand its portfolio, A.G. Barr is looking to tap into new markets.
So far, this has been going well. And with profits anticipated to come in at £49.5m for the year, the current market cap of £645m looks like good value to me.
Passive income
At first sight, the company has a patchy record when it comes to passive income. The dividend was scrapped in 2021 and still hasn’t recovered to its pre-pandemic levels.
That makes it look like the business didn’t manage its cash flows well, but I think this is a mistake. Instead of dividends, the company made the acquisitions that are now boosting its earnings.
In fact, before 2021, A.G. Barr increased its dividend by an average of 9% per year for two decades. So barring another pandemic, I think this could be a reliable source of passive income.
With the acquisition activity complete, I think the chances of the dividend getting back to where it was are pretty good. At today’s prices, that would be a 3% yield.
That might not sound like much, but if it grows at its previous rate, it will turn into something significant pretty quickly. A falling share count is also a bonus in this regard.
3,484 shares
It’s well-known that drinks like Irn Bru aren’t particularly good for people. So there’s a constant risk that health-conscious consumers might switch to healthier alternatives.
I don’t see this as a significant danger, though. The health benefits of avoiding sparkling drinks have been known for a while, so I’m sceptical that a sudden change is in the offing.
At today’s prices, £20,000 would get me 3,484 shares. If I had that kind of cash available, I’d think seriously about making a big investment in A.G. Barr right now.
The stock is well down from where it was five years ago, but I think the business is in a better position. To me, that means the value equation is better for investors.
