Anheuser-Busch InBev: The Case For A Dividend Cut

by The Compound Investor

Anheuser-Busch InBev (BUD) has been involved in three deals that have topped $20,000m in the past decade, the most recent being last year’s buy-out of SABMiller. Total balance sheet debt levels have ballooned well beyond the $100,000m mark as a result. In that linked article, I briefly mentioned the prospect of a dividend cut in order to tackle the debt burden. Understandably, a large proportion of shareholders tend not to be too keen on that idea. On the other hand, the company seems far more open to it. For what it’s worth I’m also on board with the plan. In fact, I’d happily welcome a cut at this point.

That may seem an odd statement for a guy who blogs about dividend stocks. To better explain why, let’s first consider the company’s overall cashflow situation with respect to the cost of its debt. As it stands, the total debt pile clocks in at around $120,000m in gross terms. Call it $110,000m after netting out $10,000m or so in cash and short-term investments. The annual interest bill on that debt pile will clock in at somewhere in the 4% region according to the company’s 3Q17 results. Quick math therefore puts it at somewhere in the $4,500m area in cash terms. That’s a lot of money to save.

To put that figure into some context, analysts currently have EBITDA coming in at around $22,000m for FY17. Going forward, we will hopefully see some gains from the SABMiller deal coming through; the result of which would put annual EBITDA in the $25,000m region by FY19. Management’s long-term net debt target is circa 2x EBITDA. Let’s call it $50,000m in nominal terms based on the above estimate of FY19 EBITDA. On that basis, the company needs to achieve around $60,000m in net debt reduction in order to hit its leverage target. Needless to say, that is a heck of a lot of debt to cut.

Debt Reduction

Now, the company probably throws of surplus cash of just over $5,000m by the end of FY19. I arrive at that number after stripping out interest, taxes, capital expenditure and the current level of dividend spending. Back of the envelope math puts that at less than 10% of its total debt reduction target. It would take over a decade for the company to hit its goal absent asset sales or dividend cuts. Cutting the dividend in half, which would leave a token yield of 1.9% based on the current share price, might well ruffle a few feathers, but it would also boost that annual surplus cash figure to almost $10,000m.

Here’s where a rapid debt reduction strategy becomes slightly more appealing to shareholders. In terms of annual interest expense, we’re looking at around $2,400m if we use 2017 interest rates and $60,000m in net debt. That represents potential annual savings of around $2,000m compared to the company’s current level of interest expense.

In terms of the bottom line, we would be looking at a tailwind of around 15% based on analyst estimates for FY18 earnings. Seeing that cash go into shareholder pockets rather than bondholders’ pockets seems to be a prize worth going for, even if it does require shorter-term sacrifices in order to get there quickly.

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