Between 1988 and 1998, the price of Coca-Cola advanced from $2 per share on a split-adjusted basis to $43 per share, turning a $10,000 KO investment into something around $200,000-$250,000, depending on whether dividends were reinvested and the taxation applied to the account. Between 1998 and 2018, the stock has remained essentially flat, changing only from $43 to $46 over the past twenty years. If you have been a shareholder, the sum of your returns for the past two decades is little more than the dividend you have received.
That is not an “insult” to Coca-Cola. The business performance itself has been perfectly acceptable, as earnings per share have grown at a rate of 6.8%. With the current 3.3% dividend yield, shareholders could have paced themselves for something like 10.1% annual returns over the past twenty years.
They did not get these returns, however, because Coca-Cola was priced too high during the 1990s. The P/E ratio climbed from 12x earnings in 1988 to 30x, 40x, and then 60x earnings in 1998, and has since returned to 20x earnings. The P/E ratio changes over the past twenty years is highly explanatory for why the company’s returns over this time period have likewise been unimpressive.
The implication is that recency bias can skew perception of what businesses will prove to be the best performers in the years ahead. Those stocks that have recently shot up 30%, bringing their P/E ratio above 30x earnings, may be the underperformers of tomorrow when the future growth rate is dragged down by P/E compression.
Likewise, solid businesses that have been underbid and seen their stock prices fall in recent months may be primed for the best future performance because they are valued at a discount accordingly.
For a long time, I have been waiting for the right moment to make a large investment into Anheuser-Busch Inbev (BUD) stock. The 2012 Credit Suisse report makes it clear that large beer brands have a place in creating the wealthiest families in every country, as consistent 12% compounding decade after decade leads to the creation of real, permanent value. As someone from St. Louis, I have read plenty of backstories on how local charitable contributions were funded, in part, by the sale of a large block of Anheuser-Busch stock. From 1952 through its 2008 merger, it delivered 13.2% annual returns. That’s real, market-beating wealth.
Of course, I have also taken into account that these megabrewers suffer from a similar dilemma that faces the large food companies. As other, more novel options such as the well-documented craft brands have become available, organic revenue growth has been difficult to achieve. The only real growth among international brewers has come by way of acquisition and cost-cutting, something that has held especially true for Anheuser-Busch.
Most of all, I am surprised that the investor community, as of Friday, has placed a value on BUD’s shares at $87 per share, well below the September 2016 highs of $131. I suspect that this is because earnings on paper have not grown, but the obvious explanation is that Anheuser-Busch is absorbing SAB Miller and currently has an 11% profit margin but its profit margin before the merger was 18%.
Currently, the analysts expect that, once SABMiller is fully integrated into Anheuser-Busch, its cost structure will be cut by about $3.5 billion. That is staggering amount, but it is often what happens when distribution of beverages is consolidated into fewer facilities and “last mile” distribution is outsourced to some third party provider.
As such, we live in a world where Anheuser-Busch’s current profits of $9 billion per year stands to increase to $13 billion once costs are cut and moderate growth continues. In other words, the company is a $150 billion giant trading at around $13 billion future earnings, or a moderate future P/E ratio of 11.5.
That puts the five-year return profile in a crazy-lucrative position for a company of its earnings quality, as analysts are calling for 13.5% earnings per share growth over the next five years, due mostly to SABMiller’s integration. With a 4.9% dividend yield, it is possible that Anheuser-Busch could perform at a rate of 18.4% over the next five years.
My own expectation is that even if earnings growth at 6-8%, the 4.9% dividend yield is so attractive, we are still looking at future returns of 10.9% to 12.9%. I do not expect much dividend growth in the near term, as the $113 billion debt load is unusually high and there are significant one-time costs associated with a major merger, but the price of $87 per share is such a steep discount that moderate performance will lead to very good returns and good performance will lead to excellent returns. Likewise, if the price stagnates for a couple years, there is no harm in sitting around and reinvesting a 4.9% dividend in a high quality firm, as those extra shares will get carried forward and become a “return accelerator” when the price does eventually rise.
If Anheuser-Busch stock is under $90 per share over the next twelve months, I imagine I will make it a significant holding. It’s on my short list along with Philip Morris International, Franklin Resources, General Electric, J.M. Smucker, AT&T, and Procter & Gamble. These old-guard companies are trading at substantial discounts, and I find the prospect of low-risk (defined as percentage odds of permanent capital loss for one owning for a 20+ year horizon) double-digit returns to be highly favorable. It would not surprise me if, a decade from now, we look back on the opportunity to purchase Anheuser-Busch today as analogous to the opportunity to purchase Lockheed Martin between 2010 and 2013.