Only the Strong Pubs Will Survive

LONDON -- Britain's pubs have been under severe pressure during the last five years thanks to the smoking ban, the recession and government policies that discriminate against pubs and favor supermarkets.

Some pub groups are doing a lot better than others, and one of these is JD Wetherspoon (LSE: JDW.L  ) , which issued an upbeat pre-close statement last week. This showed an 11.9% increase in sales, with a big boost from the Diamond Jubilee and Euro 2012, and it also bucked the trend by opening 40 new pubs in the last 12 months.

Wetherspoon's shares have risen by about 6% since this announcement, and as a shareholder I'm hoping for anything up to a 10% increase in both the earnings per share and the dividend when the company reports in September.

Opened fewer than planned
Wetherspoon must be doing something right if it is confident enough to be opening new pubs during these difficult times. It had, however, originally planned to open 50 pubs, but it reduced this to 40 because of higher excise duties and business rates.

To put this in perspective, two years ago over 50 British pubs were closing every day, but a recent report issued by the Campaign for Real Ale says that this has fallen to 12. To me, this slowdown is a strong indicator that the decline of the pub trade is in its final phase.

Last man standing
I don't think that the clearout of Britain's pubs has finished, if only because Britain's two largest pub owners, Enterprise Inns (LSE: ETI.L  ) and Punch Taverns, are trying to sell their pubs in order to reduce their debts. They are so heavily laden with debt that they can barely keep their heads above water, and as a result their share prices are down by over 95% from their peak.

Since some pubs nowadays are more valuable as housing, this gives their owners a big incentive to run them into the ground so that the planning authorities will allow them to be converted into houses.

But as Friedrich Nietzsche said, "That which does not kill me makes me stronger" -- and I expect that the stronger pub chains like Wetherspoon should be able to carry on growing at the expense of their struggling competitors. Their pubs should be leaner, better-run, and are more likely to be found in prime locations.

The comparison
Below is a summary of the key figures for several large British pub operators. Please note that Marston's (LSE: MARS.L  ) has substantial brewing interests, while Fuller, Smith & Turner and Greene King (LSE: GNK.L  ) also own brewers and run hotels. In contrast, Mitchells & Butlers (LSE: MAB.L  ) and Wetherspoon are primarily pub operators.

Company

Share Price (pence)

Historic EPS (pence)*

P/E Ratio

Dividend

Fuller, Smith & Turner

705.5

42.1

16.8

1.8%

Greene King

581.5

47.6

12.2

4.3%

Marston's

108.2

12.1

8.9

5.5%

Mitchells & Butlers

254.1

30.7

8.3

0%

JD Wetherspoon

436.7

35.4

12.3

2.7%

*The historic EPS is the "warts-and-all" figure, which includes the exceptional items.

Marston's trades on a low price-to-earnings ratio in part because of its large debts, while Mitchells & Butlers has a cloud over it as far as many investors are concerned (including this former shareholder), having lost over 500 million pounds by using derivatives four years ago.

Tax, tax, tax
Wetherspoon's boss, Tim Martin, is very outspoken about the way in which successive governments have treated the pub trade as a cash cow. Last year he pointed out that Wetherspoon pays 10 times more tax than its total profits, and that one of its pubs almost certainly paid more tax than Barclays.

Currently, every pint sold in a British pub is taxed at 55.4 pence, compared to just 5 pence in Germany, and once you add the VAT on top, the tax man is taking over 1 pound a pint. No wonder so many pubs are struggling.

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Tony Luckett owns shares in JD Wetherspoon but he doesn't own shares in any of the other companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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