This BUD's for You

09/28/2020 5:00 am EST

Focus: CONSUMER

Bob Ciura

Contributing Editor, Sure Dividend

The beer industry is attractive for long-term income investors. Beer companies enjoy tremendous recession-resistance and consistent profits, which are used in large part to pay dividends to shareholders, observes Bob Ciura, contributing editor to Sure Dividend.

Beer should continue to see steady demand each year, and the largest beer stocks enjoy high profit margins thanks to their ability to raise prices over time.

Belgium-based Anheuser-Busch InBev SA/NV (BUD) is the largest brewer in the world thanks to the 2008 merger of InBev and Anheuser-Busch and the 2016 acquisition of SABMiller.

The company produces, markets and sells over 500 different beer brands around the world and owns five of the top ten beer brands and 18 brands with over $1B in sales. These include Budweiser, Stella Artois and Corona. Overall, AB-InBev has 17 individual beers that each generate at least $1 billion in annual sales.

AB-InBev reported Q2 earnings on 7/30/20 and results reflected the intense damage done by the coronavirus crisis. Revenue declined 17.7% in the second quarter, and 12% in the first half of the year.

EBITDA fell by 34% in the quarter. Volumes declined by 17.1% for the quarter, although volumes grew by 0.7% in June which gives investors hope that a recovery is underway.

The company recently cut its dividend for the second time in the past two years. AB-InBev cut its dividend late in 2018 in an effort to spend extra cash on debt reduction instead of a sizable dividend.

On April 14th, AB-InBev cut its final 2019 dividend payout by 50%. This dividend reduction saved the company roughly $1.1 billion, which will help further with debt repayment. The stock currently yields 2%.

We expect AB-InBev to grow earnings-per-share by 3% per year over the next five years. Growth will be fueled by sales growth through higher prices and volumes, as well as share repurchases.

Shares trade for 15.3 times our 2020 earnings estimates, which is below our estimate of fair value at 18 times earnings. We therefore think positive returns will be boosted by 3.3% annually due to a rising valuation multiple. Total returns are expected at 8.3% per year over the next five years.

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