Dividend growth stocks can generate long-term wealth because of a compounding effect and price appreciation. At the start of spring 2024, one should benefit from the warming weather and other factors: Constellation Brands Inc. (STZ), writes Prakash Kolli, editor of Dividend Power.
STZ is a giant in alcoholic beverages. The firm used to be much smaller, but in 2013, it acquired Modelo’s US beer business with a perpetual license. Consequently, revenue, earnings, and free cash flow soared. Modelo Especial is now the number-one selling beer in America.
Besides Modelo, Constellation owns or controls the rights to sell Corona, Pacifco, Kim Crawford, Meiomi, Robert Mondavi, The Prisoner, and SVEDKA beverages. Constellation has a market capitalization of almost $50 billion and annual revenue of around $9.8 billion.
The company grows organically by selling greater beer, wine, and spirit volumes through wholesale distributors and retailers. Packaging innovation, brand extensions, and new products grow revenue and earnings per share. The company can also purchase or license smaller brands and expand distribution.
Constellation only started paying a dividend in 2015 and has increased it for nine years, placing it on the Dividend Challenger list. The forward dividend yield is 1.3% and the dividend is growing by about 5% annually.
However, dividend safety is exceptional, with a 33% payout ratio and 41% free cash flow coverage. The equity also has a “B+” dividend quality grade, meaning it’s in the 80th percentile. We expect many more dividend increases because of the high dividend safety.
The stock was recently trading at a P/E ratio of about 20X, within its range over the past decade. Hence, it is not terribly undervalued. But investors should consider this equity due to its market leadership and dividend growth potential.
Recommended Action: Buy STZ.
