“Positive start”

Today’s interim results from Vimto-owner Nichols should provide some comfort to investors. Revenue increased 13.8% to £67.4m over the first six months of 2021, with adjusted pre-tax profit moving almost 32% higher to £8.9m.

Sure, some improvement was expected due to the loosening of restrictions. Even so, news that the company’s Vimto Dilutes range significantly outperformed the UK market between January and June bodes well.

Sales of Vimto have been rebounding overseas too. International growth of 42.3% was recorded compared to the prior year. Sales in regions such as the Middle East (the drink is incredibly popular over Ramadan) appear to have held up well.

And the outlook? Well, Nichols believes that its “positive start” to 2021 should allow it to meet management expectations for the full year. However, I now wonder if the recent weather might lead to a slight increase in guidance next time around.

All told, I’m satisfied with today’s update and would be happy to add to my position today. A good recovery in sales, not to mention a strong balance sheet and solid portfolio of brands (which now includes SLUSH PUPPiE), makes me think this is one of the best stocks to buy now in this space.  

“Better than anticipated” trading

Today’s results from Nichols followed hot on the heels of fellow drinks maker AG Barr. Like the former, Barr has had to contend with the shutdown of the hospitality industry over the pandemic. Like Nichols, the company’s now showing signs of recovery.

Yesterday, Barr announced that full-year profit would now likely be ahead of expectations due to “better than anticipated” trading. This helped its previously-sluggish share price to recapture some of its lost mojo.

Again, I think Barr will do well in time and there’s more upside ahead. It’s another quality operator that’s conservatively run. It also has a good number of ‘sticky brands’ such as IRN-BRU, Rubicon and Funkin. So I’m tempted to continue accumulating the shares.

Sales tailwind

As a holder of both stocks, it’s hard for me to sit on the fence when looking at NICL and BAG. Notwithstanding this, I’m encouraged by recent trading. I also suspect the blazingly-hot summer in their home market will prove a tailwind for sales.

This isn’t to say I shouldn’t be careful. Owning multiple companies in the same sector isn’t without risk. Although no lasting damage appears to have been done, the introduction of the sugar tax on soft drinks a few years ago was proof that even the most defensive companies can face challenges.

Going forward, it goes without saying that Delta infection levels may get so bad that some restrictions may need to be re-introduced. This may hamper demand for both product stocks. 

So long as I keep my exposure in check by investing elsewhere, I think the reward will be worth it if I bought more now. 

One example of the former could be Associated British Foods (LSE: ABF).

Cheap UK shares

It’s easy to see why investors have been running from the £13bn-cap owner of Primark. Like many, the FTSE 100 company was hit hard by the first lockdown and the dramatic slowdown in retail sales. The second UK lockdown just makes things worse.

When combined with restrictions elsewhere in Europe, 57% of ABF’s total selling space is now temporarily closed. This will likely lose the company an estimated £375m in sales.

Notwithstanding this, ABF would be one of the very few retailers I’d consider buying at the current time. 

For one, the FTSE 100 giant is much more than Primark. The company actually has its fingers in a number of different sector pies, including sugar, agriculture, and ingredients. Now, this diversification won’t guarantee the share price won’t have further to fall, but it does make ABF a more defensive option than your typical listed retailer. It also goes some way to making up for the fact that budget-focused Primark doesn’t sell online.

Another reason to suggest now might be a good time to buy into ABF is that finances still look pretty solid. At the end of its last financial year (mid-September), the company had net cash before lease liabilities of £1.56bn. That’s a far better position compared to others in the market’s top tier.  

Trading at under 15 times earnings, ABF hasn’t been this much of a bargain for a while. Since clothes will always need replacing (and Primark’s value offering should appeal to shoppers during recessionary times), these cheap UK shares look to be anything but a value trap.  

Undervalued

Another stock that I think is too cheap right now is soft drinks company Nichols (LSE: NICL).

Sure, recent trading hasn’t been great. Like others in the space, Nichols has seen revenue and profits tumble over 2020. This has been due to lockdowns and the closure of shops and travel concessions that sell its drinks. Seen in this context, the fall of the Vimto-owner’s share price back to where it was during March’s market crash does make some sense. 

Like ABF however, I think there are reasons to be optimistic. The reinstatement of dividends back in June certainly smacks of confidence. I think it’s unlikely new CEO Andrew Milne would want to reverse that decision when he takes over the reins in January. The small-cap’s balance sheet is also in great shape. Nichols had almost £47m net cash in June.

A forecast price-to-earnings ratio of 16 for FY21 might not scream value but it’s important to put this in perspective. For years, Nichols traded far above this level, and justifiably so. Operating margins and returns on capital employed have long been consistently high.

Admittedly, I’m biased. I’ve held the stock for years. But I see the current price weakness as an opportunity rather than something to ruminate on. News of a falling infection rate and/or vaccine breakthrough could see these cheap shares fizz back to form.

Best UK shares to buy

With so much uncertainty swirling around the UK and global economy, I think it may be best to focus on high-quality stocks with a worldwide presence and strong balance sheets. 

With that in mind, I think it could be worth taking a closer look at Fevertree Drinks (LSE: FEVR). This company has grown from a start-up into one of the UK’s most promising growth businesses over the past few years. 

It recently started expanding into America, after taking over the UK market. Lockdown has hurt the business, but like many consumer goods champions, Fevertree’s strong customer following should help the business pull through. 

Indeed, analysts are forecasting a 30% decline in net income this year, followed by growth of 45% in 2021. Over the past six years, net income has surged from just £1.3m to £50m. As the company continues to focus on growth, I think it’s likely that this trend will continue. 

It has no debt and also supports a dividend yield of 1%. These qualities make the business stand out as one of the best UK shares to buy now. 

Centamin 

In uncertain times investors buy gold. That’s good news for gold miners like Centamin (LSE: CEY). Currently trading at a forward price-to-earnings (P/E) multiple of 16.1, the African-based group looks cheap compared to its defensive nature and growth potential. 

It also has income potential. The price of gold has jumped this year and that has helped Centamin’s bottom line. At a time when so many other companies have had to cut their dividends due to falling profits and sales, the rising gold price has helped the group maintain its cash returns to investors. The stock currently supports a dividend yield of 5%, compared to the market average of 3.5%. 

As well as this income potential, Centamin has no debt and enough cash to sustain its dividend for nearly four years without any income.

That’s why I think this is one of the best UK shares for income and growth.

Nichols

Finally, I have my eye on soft drinks producer Nichols (LSE: NICL). The company’s brands span the still, carbonated, post-mix and frozen drinks categories, which gives it a defensive nature. Even at the height of the coronavirus lockdown, consumers still had to eat and drink.

This suggests the business has what it takes to weather further coronavirus uncertainty and potentially survive another lockdown. 

After recent declines, the stock is trading at a forward P/E of 19.7, which is just below its long term average of 20. It also offers a dividend yield of nearly 3% and the balance sheet is stuffed full of cash.

At the end of the firm’s most recently reported financial period, Nichols’ cash balance was worth two years of dividends.

Like the UK shares listed above, these qualities make the company highly appealing, in my opinion. 

Turning out something fizzy in a can and slapping a label on it does not, however, guarantee success. Business models differ, consumer tastes have to be considered and marketed to appropriately, and competition is ever-present. Therefore an investor still needs to do their research.

The larger beverage companies will probably be well known to investors. So, let’s venture off the beaten track and explore the drinks makers with market caps under £1bn. We have soft drinks makers AG Barr and Nichols (LSE:NICL), and C&C Group, which produces ciders, beers and spirits. Finally, we have Stock Spirits (LSE:STCK), which produces, you guessed it, spirits, but market mainly in Eastern Europe.

Recipes for success

The four companies will be ranked on three measures each for profitability and return on investment, two measures of balance sheet strength, two measures of growth (in revenue and EPS), and dividend yield. For each company, we will average their rankings, and the winner will be the one whose mean is the closet to four. The table below shows the relevant data for each of the companies.

It looks like Nichols is the winner, based on the information collected, with an average score of 3.64. Second place goes to Stock Spirits with an average of 2.36, third to AG Barr with 2.27, and fourth to C&C Group with 1.72.

More pop less fizz

The data collected reflects the past performance of the companies analysed. Investment performance depends on the future. Therefore, broker recommendations can serve as a useful guide for the future. I have typically used the highest percentage of buy or outperform recommendations in picking the best prospect.

By this measure, Stock Spirits is the winner. As of 14 May, 100% of recommendations for the share were either buy or outperform. Nichols comes dead last; all five suggestions are that the stock should be held. These are, of course, smaller-cap stocks, and analyst coverage is relatively low, which may distort the results.

If we look at share price forecasts for the two stocks, the highest expectations for Nichols and Stock Spirits are 49.5% and 53.2% gains, respectively, over 12 months. There is not much separating the two stocks here, yet the analysis of the recommendations provides a stark difference. Something does not quite add up.

Sharing the best drink

Nichols recently announced it is suspending its dividend despite having £40m in the bank, which is enough to cover the dividend payment four times over, and zero debt. Investors will be disappointed by this, but it does point to Nichols having the edge over Stock Spirits in financial strength. 

Stock Spirits is by no means a slouch in the balance sheet department. However, given the coronavirus crisis, I would tend to favour the additional strength and past performance of Nichols. However, Stock Spirits looks like a solid company and is favoured by a few brokers. 

Regular Motley Fool readers will know I’ve been banging on for years in praise of the couple of dozen long-established family businesses listed on the UK stock market. Pubs group Fuller, Smith & Turner (LSE: FSTA), soft drinks firm Nichols (LSE: NICL), and lighting company FW Thorpe (LSE: TFW) are three such firms. Let me show you their blue-chip credentials, and why I’d be more than happy to buy them today.

Building long-term wealth

Strong balance sheets, and careful stewardship through multiple economic cycles and market crashes, are features of these businesses. I believe these qualities align well with the aims of investors seeking to steadily build wealth over the long term.

Furthermore, with a largely stable shareholder base of family members, and like-minded long-term investors, these companies’ share prices tend to hold up relatively well through the sort of market crash we’re currently experiencing.

The table below shows the performances of the FTSE 100, Fullers, Nichols, and Thorpe since markets went into free-fall after 21 February.

Seven decades of dividend growth

Fullers (founded 1845) owns premium pubs and hotels, as well as craft cider and gourmet pizza restaurant chain The Stable. As you can see, it’s outperformed the FTSE 100. This is despite it being in one of the sectors most heavily impacted by Covid-19 fears. For example, blue-chip Whitbread, the owner of Premier Inn — and food and drink chains, including Brewers Fayre — has seen its shares plummet 46%.

Fullers has a strong, freehold property-backed balance sheet. Furthermore, the sale of its brewing business last year, with cash proceeds of over £200m, now looks very timely. The company has a remarkable dividend record of seven decades of unbroken growth. The running yield of 3% and price-to-earnings (P/E) ratio of 14 indicate value against historical standards. And the same is true for Nichols and Thorpe.

Defensive out-performer

Nichols (founded 1908) owns a portfolio of still and carbonated drinks brands, headed by its flagship brand Vimto. The superior performance of its shares (-5%) versus the FTSE 100 reflects the defensive characteristics of the business. Having said that, it’s also outperformed Footsie drinks giant Diageo (-23%), which is widely seen as an exemplar of blue-chip quality.

Nichols’ latest annual results show cash of £40.9m on the balance sheet at the year-end, and no debt. The cash-adjusted P/E is 17 and the running dividend yield is 3%.

Another cash-rich small-cap stock

FW Thorpe (founded 1936) designs, manufactures and supplies professional lighting systems. It serves diverse industries and customers. Nevertheless, it’s more geared to the general economic backdrop than a company like Nichols. In other words, it’s a cyclical rather than defensive business. Yet its shares (-14%) have significantly outperformed not only the FTSE 100 during this market crash, but also classy blue-chip sector peer Halma (-19%).

Thorpe is another cash-rich family business. It had £30.8m on its balance sheet and no debt at its last year-end. The cash-adjusted P/E is 17.8 and the running dividend yield is 2%.

Hopefully, you can now see why I believe Fullers, Nichols and Thorpe deserve to be called blue-chip small-caps.

The mid-cap’s shares were up a stunning 15% this morning as the company reported that adjusted pre-tax profit for the 2020 financial year (which ended on 25 January) would be “at the top end of current market expectations, just ahead of £37m.”

Despite facing “a combination of challenging trading conditions during the year,” Barr said revenue was likely to come in around £255m. While this may be 9% lower than the £279m achieved in 2018, investors were clearly comforted by news that sales of its flagship drink returned to growth in the fourth quarter after consumers had previously baulked at management’s decision to increase prices. Elsewhere, the company’s Funkin cocktail solutions continue to win fans and issues relating its Rockstar and Rubicon brands appear to have been resolved. 

The outlook is also positive. Although the market “remains challenging,” Barr predicted that the “encouraging trading momentum” witnessed towards the end of its financial year is likely to continue in 2020.

Taking the above into account, I remain bullish on the FTSE 250 stock and continue to rate it as a decent addition to most quality-focused portfolios. At 20 times forecast earnings even before today’s news, the shares are hardly cheap.

As one of the UK’s most successful fund managers recently remarked, however, the assumption that value stocks will deliver superior returns has been misplaced for a while now. But the fact that there’s also minimal debt on the balance sheet may prove hugely beneficial if/when sentiment on the economy sours and this great bull run finally comes to an end.

Next to pop?

AG Barr isn’t the only member of the drinks industry to have found things tough recently. Tonic water specialist Fevertree‘s troubles are well publicised. Less talked about is Vimto-maker Nichols (LSE: NICL).

Shares in the business have been under pressure of late following news that Saudi Arabia and the UAE have implemented a 50% tax on sweetened drinks, regardless of the sweetening method used by the companies manufacturing them.

This means the latter can’t simply reformulate their products (as they have in the UK following the introduction of the sugar tax). As a result, the company warned in December that FY20 pre-tax profit may come in “materially below current expectations.“

While clearly a setback for Nichols, I wonder if the market might be overreacting. At roughly £7m, sales in these countries represent only a small proportion of its total revenue. Moreover, the full impact won’t be known until after Ramadan (April 23-May 23).

Given the popularity of the Vimto brand, there’s always the possibility that things won’t turn out quite as bad as investors think. Aside from this, it’s worth mentioning Nichols continues to do just fine in its core UK market with sales hitting £117.7m in 2019, despite strong prior year comparatives. 

Factor in the relatively defensive nature of its business, consistent hikes to the dividend, a bulletproof balance sheet, and high returns on capital, Nichols still justifies its P/E ratio of 19, in my view. I have no hesitation in retaining (and potentially adding to) my holding in 2020.

That’s been a big mistake on my part. The share price is around 375% higher than it was 10 years ago and there’s been a stream of rising dividends to collect along the way for shareholders.

I always knew the firm had the kind of defensive business that could generate generally rising revenues, earnings and cash flow – ideal for supporting a dividend that goes up a bit each year. And that is exactly what Nichols has delivered. It would have been a cracking long-term buy-and-hold investment, but the valuation always seemed a little too expensive, to me.

Consolidation?

However, although the underlying operations have continued to make progress, the share price has moved broadly sideways for around three years and it could be a good time for me to revisit the stock. With the share price close to 1,420p, the forward-looking earnings multiple for 2020 is just over 19 and the anticipated dividend yield is around 3%.

Not a bargain-basement valuation, but City analysts following the firm predict mid-single-digit-percentage increases in the dividend ahead. Meanwhile, the quality metrics remain robust, with the operating margin and the return-on-capital figure both above 20%. And the balance sheet is strong – Nichols runs a net cash position.

Such slick finances have been created by the company’s branded products in the Still and Carbonate categories, such as Feel Good, Starslush, ICEE, Levi Roots and Sunkist. And the lead Vimto brand is popular in the UK and around the world, “particularly in the Middle East and Africa.”

Today’s update covers trading during 2019 and there was modest growth in the top line with revenue increasing by 3.6% compared to the previous year. All three areas of the business grew, the company said in the report. The directors put the progress down to the benefits of a “strong” diversified operating model.

Confident directors – nice!

Chairman John Nichols said in the report that the directors are pleased with the sales progress during the year and the Vimto brand “performed very well in the UK, despite strong prior year comparatives.” Looking ahead, the directors are “confident” the firm will make long-term progress. And so am I. The long-term trading and financial records are steady, and this is exactly the kind of vehicle I’d aim to use for compounding funds for my retirement pot.

Despite the 375% rise in the share price over the past decade, I’d aim to buy some of the shares during periods of stock market pessimism, or when short-term issues knock the price back. After that, this is one I’d tuck away and forget about for the next 10 years while reinvesting the dividend income along the way.

Earnings growth

My first income pick for 2019 was soft drink producer Nichols (LSE: NICL). The company, which produces soft drinks under the Vimto brand, as well as the Feel Good, Starslush, Levi Roots and Sunkist brands, has a track record of delivering impressive returns for investors over the long term, and it didn’t disappoint in 2019.

Year-to-date, the stock has returned 22.2%, outperforming the broader market by 8.1%.

Shares in Nichols rallied strongly during the first half of the year following the publication of the company’s first-half results. Pre-tax profit increased by 2% during the first half, and revenue jumped 10.2%, putting the business on track to hit City expectations for the full year.

Analysts are expecting the company to report overall earnings growth of 4% for 2019, followed by growth of 5.3% for 2020. The dividend is expected to grow by 5.3% and 7% for each year respectively.

The last time I covered Nichols, I was wary of its high valuation. Still, considering the stock’s performance over the past 12 months, I’m willing to overlook the premium multiple the market has placed on the shares this time, I recommend this stock as an excellent income investment today. Shares in Nichols currently support a dividend yield of 2.6% and trade at a forward P/E of 21.6.

Beating the market

The other dividend stock that I recommended for 2019 was the much bigger Coca-Cola HBC (LSE: CCH). Over the past 12 months, this investment has outperformed the FTSE 100 by around 9%, including dividends. I reckon this trend is set to continue.

As I highlighted at the beginning of 2019, Coca-Cola HBC does not offer the highest dividend yield on the market (it currently yields 2.1%). However, what the company does have is a relatively clean balance sheet and robust cash flows. These factors should help support dividend growth going forward.

City analysts believe the firm has the potential to distribute €0.71 per share in 2020, which puts the payout on track for growth of nearly 100% since 2013. The same can be said for the company’s earnings per share.

Coca-Cola HBC has adopted a buy-and-build strategy. The company is reinvesting cash flows from operations back into acquisitions, which is helping the business grow revenues and improve profit margins at the same time as acquisition synergies flow through to the bottom line.

Using this strategy, as well as other cost-saving initiatives, the firm’s operating profit margin has increased from 5.4% in 2013 to around 9.6% for 2018.

So, while shares in Coca-Cola HBC, might immediately look expensive at first glance (trading at a forward P/E of 18.9) I think this is a price worth paying for the stock considering the growth it has produced over the past 10 years and is likely to generate over the next decade.

Fruit punch

Famous for its Vimto brand, Nichols (LSE:NICL) has been performing well of late, but with so much economic uncertainty in the UK, I’m not sure its current share price can hold for 2020.

This Aim-listed stock published a solid set of results on 17 July for the half-year ended 30 June. It reported a 10.2% increase in group revenue and a 2% rise in operating profit, although its operating profit margin was down 1.5%. Earnings before interest, tax, depreciation and amortisation (EBITDA) increased to £15.3m from £14m during the same period in 2018.

An upbeat non-exec chairman John Nichols said the firm “delivered another good trading performance, with growth across both the UK and international markets. As a result, we have increased the interim dividend by 9.7%.”

Is it a Buy to me? Well, the PEG ratio of 5.8 shows this stock could be overvalued and its current share price is above its future cash flow value. Conflict in Yemen has previously affected shipments to Saudi Arabia but this doesn’t appear to be an ongoing problem, yet international trade worries could well be a concern. However, Vimto is considered Brexit-proof as its key ingredients are sourced in Britain and all Nichols’ products are produced in the UK. I’m concerned that this has already been factored into the share price though, and along with its high PEG ratio, its price-to-earnings ratio is high at 25.

Yet the company remains interesting. Vimto has been around for 110 years and is popular in the Middle East during Ramadan. Nowadays, the brand includes sugar-free versions, cordial, chewy sweets, merchandise, novelty sweets, frozen lollies and jellies. I am sure this company will survive, but if growth is stagnant or international tensions cause problems, it may suffer a share price drop in the meantime. 

Onwards and upwards

Another soft drinks producer worth watching is Britvic (LSE:BVIC). Established in the 1930s, its soft drinks include Robinsons, J2O and R Whites. It has survived the sugar-tax relatively unscathed as its range of already-sugar-free drinks has given it a competitive edge. This is unlike competitor AG Barr, the Irn-Bru-maker, which saw its share price plummet after announcing a profit warning.

Britvic has a market cap of £2.3bn and a dividend yield of 3.4%. Its earnings per share are 44.5p and it’s a FTSE 250 stock. The company is confident it will meet analysts’ forecasts for the full year, by focusing tightly on cost control, which is reassuring in challenging times.

Britvic is a steady business with dependable sales, a good track record of growth and reliable income streams. These include the Britvic branded drinks it exports internationally and licenses to franchise partners, along with PepsiCo products it’s licensed to produce and sell in the UK and Ireland.

Its profit margin is 7.7%, operating margin is 10% and it has a price-to-earnings ratio of 19, which is quite high but not so bad when compared to Nichols.

If you already own Nichols, then I think you should Hold. Britvic on the other hand I deem a Buy.

But £5 per day is £150 per month. And as I’ll explain, I think this could be enough to build a profitable stock market income fund.

How does this work?

A typical dealing charge of £10 would wipe out 6.6% of your £150 monthly budget in one trade alone. That’s no good. The secret to investing small amounts in stocks is to use regular investing plans. These allow you to buy the same stocks on a scheduled day each month, for a much lower fee.

Of course, this discount doesn’t apply to selling stocks, where the full dealing charge will apply. So our mission is to buy stocks we’re unlikely to want to sell. Difficult, but not impossible.

Here are three stocks I’d be happy to spend £50 on each month, to build a long-term passive income.

Generous payout funds 6% yield

My first choice is home and motor insurer Hastings Group (LSE: HSTG). Like most insurance companies at the moment, growth is slow but the business generates plenty of spare cash. Most of this is returned to shareholders through generous dividends.

Hastings’ 2018 results show that the number of active customer policies rose by 2.5% last year, while net profit rose by 3% to £130.6m. The company expects more of the same in 2019, and has decided to increase its dividend payout ratio to reflect limited growth opportunities.

For 2019, the dividend payout ratio will increase to between 65% and 75% of earnings. Based on current forecasts, I estimate that this will gives the stock a forecast yield of 6.6% for 2019. I’d be happy to buy and hold the shares for income at this level.

Profit from China growth

My next pick is luxury fashion brand Burberry Group (LSE: BRBY). This company can trace its history back to 1856 and remains popular and highly profitable today. One particular attraction is that investing in this business provides direct exposure to growing wealth in Asian markets, especially China.

Another attraction is that this firm’s upmarket appeal means that historically, it’s always bounced back quickly after recessions.

The final reason why I’d buy is that this business is very profitable, with a return on capital employed of about 25%. This helps to secure strong cash generation to support dividend growth.

The shareholder payout has grown by an average of 7% each year since 2013, well above inflation. Although the starting yield seems low at 2.2%, I expect continued long-term growth.

A drink that’s loved by millions

My final pick is soft drinks group Nichols (LSE: NICL), which makes Vimto, Sunkist and a range of other popular soft drinks. Vimto was invented 110 years ago by the grandfather of company chairman John Nichols.

Like Burberry, this family firm enjoys high profit margins thanks to the strength of its brands. An operating margin of 22% helped to lift pre-tax profit by 4% to £31.8m in 2018. Strong cash generation meant that the company was able to increase the dividend by 14% to 38.1p per share last year.

If people have been drinking Vimto for 110 years, I suspect they will continue to do so. The starting dividend yield of 2.5% may seem modest, but this payout has doubled in six years. A stock I’d buy and tuck away.