STOCKS

A great first quarter for Ambev (NYSE: ABV) up against some very tough year-to-year comparisons. Earnings per share grew by 24.7% and net sales by 8.2% in the first quarter, the company reported on May 5. Costs rose, but the company still managed to show a 0.1 percentage point increase in companywide margins as the higher-margin Brazilian business grew faster than operations in the rest of Latin America and Canada.

With the Brazilian stock market facing strong headwinds in 2010 from the Banco Central do Brazil’s decision to raise interest rates to fight inflation, I would be tempted to sell these shares and sit the year out—except that Ambev is very likely to lift the cap on dividends it imposed in 2009 to increase its debt repayments. (For more on the macroeconomic picture in Brazil, see this recent post.)

Cash from operations grew in the quarter by 26.1% from the first quarter of 2009. The company has already announced one dividend payment, and it looks like the company is on a path that would produce a dividend yield of about 5%.

The one thing that might disrupt that dividend scenario is an acquisition of Mexican beer company Grupo Modelo (OTC: GPMCY). I think that acquisition would be a good long-term move for Ambev since it would increase the company’s presence in the Mexican market and put pressure on competitors, but it could well postpone the increase in the near-term payout.

As of May 17, I’m leaving my target price at $118 by October 2010.

Full disclosure: I own shares of AmBev in my personal portfolio.

Tickers Mentioned: ABV, GPMCY

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