In the past month or so, I’ve become very curious about trying to figure out what Anheuser-Busch’s dividend future might look like. At first, my curiosity was tied to the fact that I’m from St. Louis, and the brewery had been the trademark business of economic pride.
You know how people have a tendency to own companies located geographically near them, especially before the 2000s liberated stock data and dividend histories for investors to broaden their scope? Well, if someone in St. Louis had ever bought the local company, on the basis that they could actually see the factories and see people consuming the wide array of alcoholic products every Friday and Saturday night, they would have built significant wealth.
The specific numbers on Anheuser-Busch’s history are starting to fade as the result of the Inbev merger so I might need to print out hard copies to save for my records, but the history is impressive. If you bought $4,500 worth of the stock in 1975, you would have received a cash payout of $432,000 during the 2008-2009 buyout, assuming optimal tax strategy. Had you made that $4,500 investment in 1985 instead, your payout would have been $112,000. And if you got in starting in 1995, your $4,500 investment would have had you walking away with $29,400. From a growth perspective, it was sort of a ‘70s, ‘80s, and ‘90s, as shareholders would pick up 13% dividend increases here and 18% dividend increases there along the way, and share price appreciation that wasn’t all that far behind.
Things started slowing down in the 2000s, and that is partially why Inbev was able to convince the existing shareholders that a takeover was appropriate—sure, the $70 per share buyout offer didn’t hurt, but long-term investors that remembered the glory days of high dividend growth and a stock price doubling every five or six years were ready for a shakeup after a stagnating stock price and meager 4% and 5% dividend growth characterized the 2000s.
But that stuff is neither here nor there.
What is really on my mind is how much differently I see the future of this company’s dividend compared to what I’m seeing from the analyst estimates. Normally, when I study a company, the range of my future projections fall within one to three percentage points of what other analysts are seeing, but Anheuser-Busch is shaping up to be a notable exception.
Optimistic analysts are predicting 10-12% future dividend growth for the brewer, and the more moderate ones have figures somewhere around 9%.
When I look at the company’s balance sheet, here is what I see: (1) A company carrying $49.1 billion in debt as the lingering effects of its merger activity. (2) A company with pension assets of $6.4 billion and pension obligations of $9.1 billion, although a lot of this disparity has to deal with the effects of low interest rates so that a return to normal interest rates will help bridge these pension shortfalls you are seeing. (3) A company that increased its dividend far faster than profits by 2013.
I’ll explain #3 better. In 2012, Anheuser-Busch made $4.45 in profit, and paid out a $1.56 dividend. In other words, 35% of the company’s profits went towards the dividend. In 2013, the dividend went all the way up to $3.03, but profits only grew to $4.81. In other words, the dividend quickly came to account for 63% of the company’s overall profits.
It generates $43 billion in annual revenue, so organic growth is hard absent acquisitions—heck, Anheuser-Busch is having to fight off the emergence of the faddish local brewery markets just to hold its turf. The executive team is talking about growing into China, Latin America, and South America, but when you’re already pulling in $43 billion, you’d have to add $4.3 billion in revenues in the first year alone if you wanted to achieve 10% top-line growth. When you’re big and have lots of debt and other obligations, you can’t expect to be Brown-Forman anymore and give out 10% annual dividend increases to shareholders every year like it’s Halloween candy.
By the way, just because I anticipate slow to moderate growth with something, you shouldn’t interpret that as me saying you should sell your Anheuser-Busch Inbev ADRs if you have any. The brands are excellent, reaching that Coca-Cola level where people will actually spend $80 for a collared shirt that carries an A-B logo.
People will be drinking Budweiser, Bud Light, Stella Artois, and most of the other 200 brands in 2024, 2034, and 2044. It really is on that short list of international stocks along with Royal Dutch Shell and Nestle that you can hold for years and years, dutifully reinvesting your dividends, without ever having to worry about it disappearing a la Wachovia. Periods of slow growth come with the territory of long-term investing. Even in the mid 1980s, Exxon Mobil had a six-year period of 3-5% growth, and still managed to deliver 12.5% returns from 1980 to 2013, so these things do work themselves out (my guess? Either Anheuser-Busch will pull out some unexpected acquisitions that quickly increase earnings per share, or the debt will decline and AB will have more money to spend on future growth than servicing past obligations).
But I’m not sure why a dividend investor would buy Anheuser-Busch Inbev today, at these prices. It is trading at 23x profits, easily the loftiest valuation it has experienced since the 2009 AB merger with Inbev (briefly in 2010, the company traded at 21x profits). Trust me, you will see a day when it trades 17x profits again. Heck, it happened in four of the past six years. And plus, the Belgians charge a separate 25% dividend tax, which can be reduced to 15% with the proper tax filing paperwork (if you own Anheuser-Busch Inbev in an IRA, you won’t be able to recapture this amount). And that is in addition to the separate US taxation of the dividend.
I’d very surprised if you saw Anheuser-Busch grow their dividend by the 9-12% amount that you are seeing from the brewery sector analysts, absent an acquisition or the management team continuing to increase the payout ratio. If I’m wrong, though, and the dividend doubles to $6 per share or something like that in 2020, then I’m going to have to step back and figure out where in my thought process I went wrong. At a minimum, it would mean I can’t figure out dividend projections for large brewers, and at worst, it would mean my entire process of studying dividend projections could be wrong. We shall see.
Originally posted 2014-08-22 08:00:29.