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Ben Reynolds
Ben Reynolds
Articles (802)  | Author's Website |

Anheuser-Busch InBev: Top Brand Portfolio Will Fuel Future Growth

The brewer has had a rough ride over the past year, but its huge portfolio of leading brands is a major competitive advantage

July 08, 2020 | About:

Anheuser-Busch InBev SA (NYSE:BUD) is the world’s largest brewer. The company produces, markets and sells over 500 different beer brands. Of its products, 17 generate more than $1 billion in annual sales each. These include Budweiser, Stellar Artois, Corona and many other iconic labels.

As a result, the company dominates the beer industry, having around half of the U.S.’s market share. You can get a deep-dive into the company’s 17 billion-dollar brands here.

Over the past several years, the company has closed multiple large acquisitions to expand its portfolio of brands. However, this has been an expensive process that required management to raise billions in debt each time.

As a result, with a whopping $103 billion of long-term debt on its balance sheet, it is the seventh-most indebted company in the world. Shares are currently trading at their 2010 levels due to multiple headwinds in operations. Anheuser-Busch’s nearly decade-low price presents an attractive opportunity.

Earnings and dividends

Anheuser-Busch’s merger with SABMiller had multiple benefits, including saving billions in costs, unlocking distribution synergies and earnings per share growth. In recent years, however, the company has suffered from reduced gross margins, higher financing costs and write-downs.

Along with earnings, dividends saw consecutive annual increases from the merger until 2017, when management cut dividends amid an unsustainable payout ratio. The impact of Covid-19 further reduced demand for the company’s products as many restaurants were forced to close. In an effort to maintain solvency and deleverage its balance sheet in these unprecedented times, management had to cut the dividend for a second time.

With poor execution and little to be excited about the future, shareholders dumped their shares back to their decade lows. Despite the depressed share price, the stock is currently yielding more than 3%.

We are projecting the company to close fiscal 2020 with earnings per share of around $3.47. Medium-term growth is then expected at around 3% as sales growth slowly resumes. We consider that the current annual dividend per share of about $1.04 is safe at a projected 30% payout ratio. Dividend growth will be limited, however, as the company is currently prioritizing paying down its enormous debt position.

In terms of future catalysts, the company has a couple of exciting projects that could turn out to be promising in the foreseeable future, growing the top and bottom lines. The company’s Seltzer segment, for example, grew by nearly 600% in the first quarter. This colossal growth far exceeded the industry seltzer segment growth, which, according to IRI, was still an impressive 300% over the same period. Such returns could offset the decline in the company’s more traditional labels and create new, long-term profit-generating brands, strengthening the company’s profitability going forward.

Valuation and future returns

Anheuser-Busch’s forward price-earnings ratio is close to 15, as we expect the company to resume its earnings per share generation. At such a forward valuation, we see the potential for a multiple expansion toward the company’s average of around 18.

Assuming that earnings per share grows annually at around 3%, the dividend is maintained and the company’s valuation returns to a less discouraging multiple, we expect investors to receive medium-term annual returns in the high single digits.

However, this is mostly subject to the company’s operations returning towards normality. A potential second wave of restaurant closings resulting from Covid-19’s expansion could adversely affect operations and lead to further negative returns going forward.

The risks

While every investment is subject to risks, investing in Anheuser-Busch is attached to a few more, hence its currently low forward valuation.

The most significant risk is the company’s sole avenue to grow through acquisitions. In our quarterly Sure Dividend report on the stock, we highlighted the falling demand for the company’s flagship products. A significant factor has been the rise of the new, direct-to-consumer online brands that are slowly taking market share away.

Moreover, the company’s acquisitions have historically hurt shareholders. Not only have several write-offs wiped out asset value from time time, but currently, 75% of the company’s assets is in goodwill.

With such a massive amount of goodwill, a potential impairment would deteriorate shareholder value. This is not a farfetched scenario as 3G Capital, a major shareholder, led to a similar cost-cutting case with Kraft Heinz (KHC), which led to shares at their current depressed state.

Conclusion

Anheuser-Busch InBev is an industry behemoth with a robust portfolio of lifelong brands. However, its acquisition-focused strategy has piled up a mountain of debt. Along with a massive amount of goodwill on its balance sheet, its financials are certainly not the prettiest in the market. Covid-19 has massively damaged the company’s volume flow as well, which resulted in another back-to-back dividend cut.

However, with economies reopening, the company could return to its usual volumes sooner than later. Under normal conditions, the company remains a cash cow with billions in annual profits. The low valuation and solid dividend yield are attractive for value and income investors.

Disclosure: No positions.

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About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

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