Around ten months ago I wrote a piece on the case for a dividend cut at Anheuser Busch InBev. Well, it turns out that the company has gone and done just that. Alongside its Q3 2018 results the beer giant announced that it was slashing its dividend in half. From now on the annual pay-out will be €1.80 per share instead of the €3.60 it was in fiscal year 2017. Unsurprisingly the market reacted rather poorly with the shares losing around 9% of their value after the news broke. Since its peak two years ago the stock is down just over 40%.
Though 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 market’s 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. Normalized net profit for the third quarter of 2018 was $2.23 billion versus $2.34 billion in the equivalent period last year. Quarterly earnings per share were also down on the same basis.
Readers who read my previous thoughts on Anheuser-Busch’s dividend will know where I stand. Firstly though let’s start by stating that the 50% cut represented around $4 billion in actual cash terms. That is cash that will, or at least should, be diverted to reducing the crushing net debt burden. The prize is slashing that roughly $4 billion annual interest bill. It is an absolutely staggering amount of cash to spend solely on debt service. We’re talking a figure that is worth roughly half of annual net profit. And as net debt falls, interest payments reduce. That cash is then free to flow down to the bottom line and shareholder pockets. In other words although it may seem a bitter pill to swallow for shareholders it isn’t all downside.
The second reason I actually welcome this news is precisely because of the market response. Anheuser-Busch shares have been hammered to a level that, for the first time in a while, is quite attractive from a valuation perspective. After all last year the company cleared $4.04 per share in normalized net income. 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 in terms of yield it comes to a shade over 5%.
Now, in terms of forward earnings the mean estimate of analysts currently stands at $4.10 per share excluding one-off exceptional items. The current net debt coupon stands at 3.7% as alluded to above. Factor in the effect of accelerated debt reduction and ongoing synergies from the SABMiller merger and the forward estimates don’t seem too crazy. Next year, for instance, analysts think Anheuser-Busch will earn around $4.75 per share in net income. That would out 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.