Investors looking for stocks with competitive advantages, consistent profits, and high dividend yields should consider beer stocks.
Beer is a lucrative industry—the biggest beer companies have pricing power, and operate business models that are very resistant to recessions. This keeps their profits and dividends flowing to investors, year after year.
Molson Coors (TAP) is a particularly attractive beer stock, because it is cheap with a high dividend yield of %. In addition, the company is making big moves into new areas of growth, such as craft beer and cannabis. With a low valuation, high dividend yield, and potential for future growth, Molson Coors is an attractive beer stock to buy today.
Business Overview & Recent Earnings
Molson Coors is one of the largest U.S. brewers, with a variety of brands including Coors Light, Coors Banquet, Molson Canadian, Carling, Blue Moon, Hop Valley, Crispin Cider, as well as Miller Lite through its MillerCoors joint venture. Molson Coors has a market capitalization of $12 billion, and the company generated nearly $11 billion in sales in 2018.
The past year has been unusually difficult for Molson Coors. As a large beer company, it has struggled to adapt to changing consumer trends. Growth of large beer brands such as Coors Light has stagnated in recent years, while most of the growth in the beer industry is due to craft beers. Molson Coors has had to invest aggressively to catch up to trends.
In addition, Molson Coors is struggling with rising costs of raw materials. Cost inflation and its international business are also challenged by the trade war and tariffs between the U.S. and major trading partners.
These issues have been reflected in Molson Coors’ weak earnings reports to start 2019. In the most recent quarter, Molson Coors’ sales fell 4.4% year over year, driven by volume declines and unfavorable currency translations. Organic sales declined 1.4%, while adjusted earnings-per-share fell 19% for the quarter.
Still, Molson Coors remains highly profitable, and it has invested heavily in new growth ventures. For example, the company has branched out into two specific growth categories within the alcoholic beverages industry—hard cider and craft beer. It has developed exposure to these areas with its Crispin and Hop Valley brands. It has also expanded into cannabis, which could be a major growth catalyst. In 2018 the company announced a joint venture with HEXO Corp. to develop non-alcoholic, cannabis-infused beverages for the Canadian market.
Collectively, these initiatives could return Molson Coors to growth, even while its larger brands have flattened out. For now, the stock is highly rewarding for income investors thanks to its hefty dividend.
Pouring Out a Tall Glass of Dividends
Molson Coors serves up cash for investors, primarily through dividends. On July 18th, the company raised its dividend by 39%. The new annual dividend rate of $2.28 represents a dividend yield of 4.2%, more than double the average dividend yield of the S&P 500 Index.
Even with such a large increase, the dividend payout appears secure. With expected earnings-per-share of $4.60 for 2019, Molson Coors has a payout ratio of just under 50% for this year. The company is still only paying out slightly less than half of its EPS, which leaves plenty of cash flow left over for debt reduction and investment in growth. This speaks to the high profitability of Molson Coors’ business model, and is one of the most attractive aspects of investing in the beer industry.
Indeed, Molson Coors possesses the ability to remain profitable year after year, even during recessions. Beer is a recession-resistant product. Consumers tend to drink as much (or more) beer when the economy is in a downturn. This is how Molson Coors remained highly profitable during the Great Recession, and why it should continue to remain profitable (and pay its dividend) if another recession occurs in the near future.
Molson Coors is struggling to grow, but the company is investing in new categories to drive future growth. In the meantime, the stock is highly attractive to income investors due to its greater than 4% yield.
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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