(Published by Bob Ciura on April 12)
Anheuser-Busch InBev SA/NV (BUD, Financial) is a case study for how to successfully grow through acquisitions.
AB InBev was formed through the combination of InBev and Anheuser-Busch in 2008. In 2009, the company launched its U.S.-listed shares.
Since then, AB InBev has embarked on a number of transformative, multibillion-dollar merger and acquisition deals. In this way, it has followed a similar path as Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
The result is AB InBev is now a global beer behemoth.
It generates high profit margins, allowing the company to reward shareholders with a hefty dividend.
With that said, it is not yet a member of the Dividend Achievers, a group of 265 stocks that have raised their dividends for at least 10 consecutive years.
You can see the full Dividend Achievers List here.
But the company does have a solid 3.4% dividend yield.
AB InBev is an attractive stock for dividend income and growth.
Business overview
AB InBev is the world’s largest brewer, selling beer in more than 150 countries worldwide.
It has a massive product portfolio with more than 500 brands. Just a few of its most popular brands include:
- Budweiser
- Bud Light
- Corona
- Stella Artois
- Beck’s
- Castle
- Skol
In all, AB InBev has 18 individual brands that each generate $1 billion or more in annual sales.
The company has a global reach. Approximately 64% of its EBITDA comes from outside North America.
Source: 2016 Annual Report, page 4
AB InBev has amassed such a huge brand portfolio through various mergers and acquisitions.
It was first organized through the $52 billion merger of three separate brewing companies in 2008—Interbrew from Belgium, AmBev from Brazil and Anheuser-Busch from the U.S.
In 2013, the company acquired the remaining portion of Grupo Modelo that it did not already own for $20.1 billion.
The deal gave AB InBev full ownership of the crown jewel Corona, which is one of the company’s highest-growth brands today.
Last year, AB InBev acquired SABMiller for just over $100 billion.
This resulted in the company becoming a global powerhouse.
It generated $46 billion in sales and $16.4 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) last year alone.
Growth prospects
At its core, AB InBev’s growth strategy is to make huge acquisitions of companies with strong brands and leadership positions in their respective categories.
This gave the company high-quality brands, which provide it with the ability to raise prices over time.
As a result of its acquisition spree, AB InBev’s flagship brands are Budweiser, Stella Artois and Corona. These brands dominate their respective home markets—the U.S., Europe and Mexico.
Source: 2016 Earnings Presentation, page 7
The “big three” brands allow for the greatest pricing power. The three brands collectively grew revenue by 6.5% in 2016.
Each brand generated strong growth last year, with Corona leading the way at 14% growth.
In addition, big acquisitions provide AB-InBev with scale. It can easily leverage its global distribution and squeeze out huge cost synergies to boost profit margins.
For example, last year, AB-InBev’s U.S. business delivered its seventh consecutive year of profit margin growth. Segment EBITDA rose 2.2% to $5.6 billion while the profit margin expanded 84 basis points to 40.1%.
Going forward, AB InBev expects to cut nearly $2 billion from its cost structure over the next three to four years as a result of its SABMiller deal.
Source: 2016 Earnings Presentation, page 5
It is highly likely the company will continue its strategy of conducting enormous M&A deals. There have even been reports that AB-InBev could try to acquire Coca-Cola (KO).
In essence, AB InBev’s growth strategy can be summed up as, “if it ain’t broke, don’t fix it.”
AB InBev has been so successful in growing revenue and EBITDA with acquisitions and cost-cutting, that there is little reason why the company would not go after another $100 billion "megadeal."
The next huge merger could be into another industry altogether, such as soft drinks or food, to provide the company with diversification.
Competitive advantages & recession performance
The beer industry is a highly competitive business.
Consumption of beer has flatlined in the U.S.
As a result, growth largely comes from taking market share from competitors. The rise of smaller craft breweries over the past several years would normally be a significant competitive threat for an industry giant like AB InBev.
AB InBev, however, simply uses its deep pockets to buy smaller, fast-growing competitors. In recent years, the company has purchased several craft brewers, including Goose Island, Blue Point, Elysian, Golden Road, Karbach and Devil's Backbone.
Deep pockets are one of AB InBev’s many competitive advantages, which has fueled its growth over the years.
Another is its strong brand portfolio.
AB-InBev has a huge global beer portfolio and owns seven of the 10 most valuable beer brands in the world, according to market research firm BrandZ.
This includes Budweiser, the most valuable beer brand in the world.
The combination of strong brands and a lean cost structure serves AB-InBev well when economic conditions deteriorate.
It is further aided by its business model. Beer is a very recession-resistant product.
These qualities helped the company remain highly profitable during the Great Recession:
- 2007 EPS of $2.24
- 2008 EPS of $1.93
- 2009 EPS of $2.90
- 2010 EPS of $3.13
AB InBev saw earnings per share decline 14% in 2008, but enjoyed a quick recovery.
Valuation & expected total returns
Last year was a difficult one for AB InBev.
Overall EPS fell 46%, but approximately 80% of the decline was due to non-recurring items pertaining to the SABMiller deal.
In addition, negative currency impacts shaved 60 cents per share off of full-year earnings.
Excluding all these factors, organic EPS actually increased 2% for the year.
Using fiscal 2016 EPS before unusual items of $4.70, AB InBev stock trades for a price-earnings ratio of 23.5.
This is slightly below the average S&P 500 price-earnings ratio of 26.
As a result, the stock is modestly undervalued.
Going forward, total returns will be comprised of earnings growth and dividends. A reasonable breakdown of future returns is as follows:
- 4% to 6% organic revenue growth
- 1% earnings growth from margin expansion
- 1% earnings growth from share repurchases
- 3.4% dividend yield
As a result, total returns could reach approximately 9.4% to 11.4% per year.
AB InBev pays a semiannual dividend in euros. Last year, it paid a total annual dividend of approximately $3.81 per share in U.S. dollars, using current exchange rates.
Source: 2016 Earnings Presentation, page 32
Its total dividend was unchanged from the previous year, but AB InBev has consistently raised its dividend since the Great Recession.
Based on its recent share price, AB InBev shares have a 3.4% dividend yield.
This is an attractive yield at roughly 140 basis points above the average dividend yield of the S&P 500 Index.
Final thoughts
The current environment is challenging for AB InBev.
The strong U.S. dollar and deteriorating economic conditions in Brazil are hurting the company. The pervasive competitive threat from craft breweries only adds to the pressure.
Regardless,AB InBev continues to grow revenue and earnings. Its growth strategy is to make huge acquisitions, drastically cut costs and repeat the process over and over again.
Additionally, its 3.4% dividend yield makes it an attractive stock for income investors.
Disclosure: I am not long any of the stocks mentioned in this article.
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