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 $20b in the past decade – the most recent being last year’s buy-out of SABMiller. As a result, total balance sheet debt levels have ballooned well beyond the $100b mark here. To deal with that, I briefly mentioned the prospect of a dividend cut in that linked post from 2016. A large proportion of shareholders are understandably not too keen on that idea, though the company seems open to it. For what it is worth I am also on board with the plan. In fact, I would 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 $120b in gross terms. Call it $110b after netting out the $10b or so in cash and short-term investments on the balance sheet. According to the company’s 3Q17 results, the associated annual interest bill will clock in at somewhere in the 4% region. Quick math therefore puts it at somewhere in the $4.5b area in cash terms. Suffice to say, that is a lot of money to save!

Just to put that figure into some context, analysts currently have EBITDA coming in at around $22b for FY17. We will hopefully see some gains from the SABMiller deal coming through soon, the result of which would put annual EBITDA in the $25b region by FY19. Now, management’s long-term net debt target is circa 2x EBITDA. Let’s call it $50b in nominal terms based on the above estimate of FY19 EBITDA. On that basis, the company needs to achieve around $60b in net debt reduction to hit its leverage target. That is obviously a heck of a lot of debt to cut!

Debt Reduction

Now, the company probably throws of surplus cash of just over $5b 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 $10b.

Here’s where a rapid debt reduction strategy becomes slightly more appealing to shareholders. In terms of annual interest expense, we are looking at around $2.4b if we use 2017 interest rates and $60b in net debt. That represents potential annual savings of around $2b 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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