Anheuser-Busch: Thoughts On The Dividend Cut

by The Compound Investor

Around ten months ago I wrote a piece on the case for a dividend cut at Anheuser-Busch InBev (BUD). Well, it turns out that the company has gone and done just that. The beer giant announced that it was slashing its dividend in half after reporting 3Q18 results. From now on, the annual pay-out will clock in at €1.80 per share instead of the €3.60 it was in FY17. The market reacted rather poorly to the news, with the shares losing around 9% of their value in the immediate aftermath. Since its peak two years ago, the stock is down just over 40%.

Although the market may not be pleased, I still think that this is a good thing. If I had to offer up a reason for the poor stock price reaction, my guess would be twofold. The most obvious reason is the stampede of income investors rushing out the door. Nobody seeking stable income, ideally stable and growing income, is going to be happy with that news.

The second reason concerns the accompanying announcement of financial results. Quarterly normalized net profit came in at $2,230m, marginally lower than the $2,340m it earned in the equivalent period last year. Quarterly earnings per share also came in lower on the same basis.

Regular readers will know where I stand with respect to the dividend. Firstly, let’s start by stating that the 50% cut represents around $4,000m in actual cash terms. That is cash that will, or at least should, be diverted to reducing the crushing net debt burden. An added prize is the gradual lowering of the $4,000m annual interest bill. It is a pretty large amount of cash to spend solely on debt service.

I mean, we are basically looking at half of annual net profit spend on interest here. As net debt falls, interest payments reduce. That cash is then free to flow down to the bottom line (after tax of course) and shareholders’ pockets. Although it may seem a bitter pill to swallow for shareholders, it isn’t all downside.

The second reason I welcome this news is precisely because of the market response. Anheuser-Busch stock has been hammered to a level that, for the first time in a while, is quite attractive from a valuation perspective. After all, the company cleared $4.04 per share in normalized net income last year.

Based on the current share price of $75.60, that means we are looking at a valuation of roughly 19x prior year earnings. If you think of that figure in terms of an earnings yield then it comes to a shade over 5%. Now, the mean profit estimates of analysts currently stands at $4.10 per share excluding one-off exceptional items. Factor in the effect of accelerated debt reduction, plus ongoing synergies from the SABMiller merger, and those forward estimates don’t seem too crazy.

Next year, analysts think Anheuser-Busch will earn around $4.75 per share in net income. That puts the stock at under 16x forward earnings. The company’s revenue is actually growing at a decent enough clip – beer volume and revenue per unit volume were both up in the last quarter. My guess is that this is the best time to invest in the stock for years; a point where realistic expectations regarding long-term returns edge close to double digits.

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