Greene King’s shares dived 14% on the latest trading update. Like-for-like sales have slipped 1.2%, which is worse than the pub industry as a whole, the Brewing chain blaming poor weather conditions, leading to a weak sales in the food sector.
This is no doubt a disappointment for investors, but personally I feel the selling has been vastly overdone. With the shares now prices at a 5-year low, this could be an opportunity to buy them at a real bargain!
The pub chain has acquired Spirit in 2015, which includes the reputable Taylor Walker estate. With this and the diversity of restaurant groups under ownership (including Hungry Horse and Loch Fyne), Greene King in the long run has the potential to grow further due to the vast economies of scale it has with such a broad holding.
The shares now have a 3-year average PE rating of 8.28, which is very cheap, compared to its historic average of 10.5, and way more than JD Wetherspoon (which has a 3 year average PE rating of 20.8).
Greene King also increased their dividends for the last 10 consecutive years; with the dividend covered over twice by profits, this looks very stable to me. Even in the unlikely event the chain decides to freeze payments at their current level for the next year, this would still give a dividend yield of a whopping 5.96%! However I still believe there will be an increase from last year, since there is a lot of room for the chain to do so.
Finally, with the world cup coming round the corner in 2018, this will very likely provide a boost to pub sales, especially with England having made it to the group stages. This could help offset the latest disappointing news highlighted above as people in the UK enjoy frequenting the pubs during sporting events.
Of course, inflation due to Sterling’s fall, and the minimum wage impacting Greene King’s bottom line are issues that must be taken into consideration. But I believe the 218 year old brand will remain strong, and based on the above, I remain very confident in this company.