Anheuser-Busch InBev: Yet Another Dividend Cut

by The Compound Investor

The headline news out this week included yet another dividend cut over at Anheuser-Busch InBev (BUD). To cut a long story short, the company will now pay out a final dividend of fifty euro cents per share rather than the round one hundred previously expected. That brings the total FY19 dividend to €1.30 per share versus the expected amount of €1.80 per share. As you may expect, the stock finished the week lower than it began. It closed Friday’s trading at $45.95 on the New York Stock Exchange.

That response looks entirely reasonable at first glance. After all, this now represents the second dividend cut in under two years. Previously, stockholders were looking at an annual dividend of €3.60 per share; call it somewhere in the region of $3.75 per share given the exchange rates at the time. The comparable figure is now down to around $1.40 per share. Not good.

A Unique Crisis

Right now, I’d say the company faces two big issues. The first is the debt load. Anheuser-Busch has only generated around $6,000m in post-dividend free cash flow over the past three years, hampering efforts to get its debt down. Net debt stood at circa $95,000m at the end of last year – still equivalent to around 4.5x its annual EBITDA.

Pre-COVID-19, we may reasonably have expected the company to produce around $9,000m in surplus FY20 cashflow. I base that statement on management’s initial guidance for FY20, the upshot of which implied annual EBITDA in the $21,000m range. If the company pays circa $7,000m in interest and taxes, plus $5,000m to take care of depreciation, then we end up with our $9,000m figure. If we then subtract its annual dividend bill, we end up with $5,000m or so for debt reduction. In ordinary circumstances that might well be okay.

That brings us to the second major issue, which is that COVID-19 obviously wrecks those estimated profit figures. That much was clear when the company pulled its guidance a few weeks back. If this were any kind of normal cyclical downturn, then Anheuser-Busch would be just fine. Beer sales are not normally tied to small swings in GDP figures. Of course, this one is a rather unique crisis. Bars, restaurants and cafes have either shut down in many places (often by decree), or have witnessed catastrophic declines in sales. In Mexico, production of the unfortunately named Corona was essentially halted by decree.

At least grocery store sales are way up. Again, that is hardly surprising given a lot of folks can’t get a drink anywhere else. I actually saw my neighbors take delivery of three cases of Beck’s the day after the dividend cut, so I should thank them for helping Anheuser-Busch InBev’s cashflows during this tough time.

Liquidity

Though the situation looks pretty chaotic, I still believe we have a good investment case here. First of all, the company has around $16,000m worth of cash and short-term investments (having drawn down a $9,000m revolver a few weeks back). It had $5,000m of interest-bearing liabilities due this year, and that figure only rises to around $10,000m or so out to the end of 2022. COVID-19 should be long gone by then.

Moreover, the company still expects a large cash infusion from the sale of Carlton & United Breweries (its Australian subsidiary) to Japanese brewer Asahi for circa AUD$16,000m (call it around $10,500m in US dollars). That deal is set to complete in the immediate future. Oh, and the dividend cut means it retains an extra billion dollars or so versus its pre-cut level. Overall, it’s hard to see something terrible happening here with regards to its debt. It certainly has ample liquidity.

Valuation

That brings us to the longer-term outlook here. I will not dwell too much on the virus, mainly because I think the company will bounce back extremely quickly (even if the economy does not). On that basis, I’m working on the assumption that it will return to earning around $9,000m to $10,000m in annualized cash profits relatively quickly. Let’s call it $4.25 to $5.00 on a per-share basis, versus a current share price of circa $45.95.

Granted, the debt makes the stock less cheap than it looks from the figures above. The dividend cut, though annoying, means the company can realistically deploy at least $5,000m of retained earnings per annum toward getting it down. Back of the envelope math points to a $35,000m reduction in net debt by the middle of the decade.

Let’s say that’s worth a billion dollars to the company’s bottom line via saved interest expense. That means we could realistically see $5.50 per share in net profit here assuming zero underlying earnings growth (excluding an assumed recovery from COVID-19). It would therefore not surprise me to see the stock trade north of $80 per share again at some point in the near future. Needless to say, I think the current $45.95 share price is a steal.

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