In 2015, Anheuser-Busch stock hit a high of $130. This year, Anheuser-Busch hit a high of $136. The valuation of the stock was between 25x and 27x earnings, which made no sense to me given that the core brands were either stagnating or in decline (for example, Bud Light in 2016 ships out 10% less than it did in 2008). Even with 3G management taking aggressive action to raise the profit margin from 8% to 18%, the lack of organic sales growth meant that Anheuser-Busch didn’t deserve the type of premium you might pay for Visa, Alphabet, or Nike.
If you bought Anheuser-Busch at those valuation, you were probably setting yourself up for mid single digit returns. Nothing wrong with that–as long as you’re above 3.5% or so the decision to delay gratification still ends up making you richer–but I like to aim the bow a little higher and aim for total returns in the 8-12% annualized range.
However, the low reported earnings in the aftermath of the SABMiller acquisition and the strength of the U.S. dollar after President-Elect Trump’s victory has brought the valuation of Anheuser Busch Inbev (BUD) stock down to $101 per share. The earnings of $2.10 do not reflect Anheuser-Busch’s earnings power because the figure is clouded by enormous integrative expenses with SABMiller, and the dollar strength matters because Anheuser-Busch Inbev reports its earnings in Euros. I think this is much ado about nothing.
Next year, Anheuser-Busch is going to report profits of around $5.75 per share. That is a P/E ratio of 17.5x earnings. This is exactly the type of valuation where Anheuser-Busch stock ought to trade. Maybe its even trading at a 5-10% discount. But the point is that the 25% overvaluation has been burned off, and prospective investors now get a fair deal. Outside of the 2008-2009 recession, this $101 price marks the best valuation that Anheuser-Busch has offered new investors since the announced Inbev takeover in 2008.
Basically, Anheuser-Busch is trading at 2011 prices. But the earnings have improved from $3.63 to an expected $5.75.
The initial dividend yield is finally something that matters to an income investor. Anheuser-Busch pays out $4.40 per share in dividends, and has raised it every year under 3G management. At a price of $101 per share, that is a 4.35% starting yield. The caveat is that Belgium charges a 27% withholding tax to non-residents; the good news in response to that caveat is that most industrialized economies have a tax treaty to lessen that burden (including the United States.)
When you are dealing with a stodgy consumer business like Anheuser-Busch that brings in $44 billion in annual revenues, the best you can really hope for is a match with the historical 10% annual returns of the stock market (this is a basket of American stocks produced from 1926 through 2012).
If you are starting with a dividend of around 4%, and you are paying fair value for a stock, you need 6% earnings per share growth to get long term total returns of 10%.
That is what I expect from Anheuser-Busch. Over the long haul, I anticipate revenue growth in the 2-4% range and earnings per share growth in the 4-7%. Given Anheuser-Busch’s high debt burden, I don’t think you can expect anything greater than 7% earnings growth per share over the next two decades. And the likelihood is probably a bit below that.
Someone buying Anheuser-Busch is setting themselves up for a 4% dividend yield and 8-9% annual returns on a pre-tax basis. I don’t think it’s even trading at a better valuation than its peer Diageo, but I do think that Anheuser-Busch stock is finally trading in the realm of “intelligent investment right now” for the first time in a few years, and that 4% dividend is one of the few ways to get an initial dividend that high in the universe of blue-chip stocks.
Originally posted 2016-12-03 07:04:32.