With the summer season in full swing, it’s a good time for investors to take a closer look at some of the biggest beer stocks. These companies are naturally appealing for income and value investors, as they typically generate strong cash flow which they use to pay dividends to shareholders. And, many beer stocks like Anheuser-Busch InBev (BUD) are trading at a discount due to the coronavirus crisis.
AB-InBev is in the middle of a turnaround, as the company took on a great deal of debt to finance the acquisitions of Grupo Modelo and SABMiller. This has led to a hangover in which AB-InBev has had to pay down its excess debt. AB-InBev recently cut its dividend, but the stock still provides a market-beating yield. And with a huge portfolio of billion-dollar brands, AB-InBev stock is our top beer stock today.
Business Overview and Recent Events
Anheuser-Busch InBev is a global powerhouse in the beer industry. It is the largest beer company in the world, with a huge product portfolio consisting of over 500 brands, including 8 of the world’s top 10 most valuable beer brands. AB-InBev’s portfolio includes 17 individual brands that each generate $1 billion or more in annual sales. Some of these billion-dollar brands include Budweiser, Bud Light, Corona, Brahma, Skol, Stella Artois, Michelob Ultra, and more.
The company has had a difficult start to 2020. The coronavirus crisis has dealt all beer manufacturers a brutal blow. Even though consumer pantry stockpiling has boosted at-home beer consumption, the loss of public venues such as restaurants, bars, and stadiums has more than offset the benefits of consumer stockpiling. In the first quarter, company-wide revenue declined 5.8% year-over-year to $11 billion, down from $12.2 billion in the same quarter last year. The decline was due to a 10.5% decline in beer volume, a 0.2% decline in non-beer volumes, and a 9.2% decline in third-party products.
AB-InBev reported a net loss of $1.13 per share in the first quarter, reversing a profit of $1.80 per share in the same quarter last year. Underlying earnings-per-share, which excludes various non-recurring items, fell 30%.
This BUD Is for Value And Income Investors
AB-InBev has fallen on hard times over the past year, but the contrarian viewpoint is that the stock is undervalued, with an attractive dividend yield as well. Based on our expected earnings-per-share of $3.47 for 2020, AB-InBev stock trades for a price-to-earnings ratio of 15.2. We feel this valuation multiple is too low for a company of AB-InBev’s caliber, with so many industry-leading brands and durable competitive advantages.
Our fair value estimate is a price-to-earnings ratio of 18, which implies the potential for significant upside in the share price. If AB-InBev’s stock valuation rises to 18 by 2025, it would boost annual shareholder returns by 3.4% per year. In addition, we expect 3% annual earnings-per-share growth, plus the stock has a solid dividend yield of 3.2%. While AB-InBev cut its dividend by 50% to preserve cash, the move will allow the company to continue deleveraging to pay down debt. And, the stock still provides a significantly higher yield than the S&P 500 Index (yielding roughly 2% right now).
Through a combination of a rising valuation multiple, earnings-per-share growth, and dividends, we expect AB-InBev to generate total returns of nearly 10% over the next five years. This makes AB-InBev stock a buy in our view for value and income investors.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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