Beleaguered investors of Anheuser-Busch InBev NV (BUD) were hit with another dividend cut this past week. Note that the stock trades on Euronext and as an ADR on NYSE. This was the second dividend cut announced by the company since the acquisition of SABMiller for approximately $122 billion in 2016. AB InBev cut the dividend for the first time in late 2018 when it halved the dividend. The company did this to enhance cash flow for deleveraging due to the high amount of debt from the acquisition. The latest cut to the dividend was due to the coronavirus-induced slowdown of the global economy. The dividend was halved yet again from 1.00 EUR to 0.50 EUR. Most companies are trying to conserve cash and maintain liquidity. Anheuser-Busch is no exception. In addition, the high debt load and a leverage ratio of 4.0X limits financial flexibility. The specific statement from the company was as follows:
Given the uncertainty, volatility and continued impact of the COVID-19 pandemic, AB InBev has determined that it would be prudent and in the best interests of the Company to reduce the amount of the final 2019 dividend. This decision is consistent with the Company’s financial discipline, deleveraging commitments and other actions taken to navigate this environment.
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Overview of Anheuser-Busch InBev
Anheuser-Busch InBev is the result of a series of mergers and acquisitions that created the largest brewer in the world. The company is currently headquartered in Leuven, Belgium. The Belgium brewery traces its history back to 1366. The company has approximately 500 beer brands, which primarily include Budweiser, Corona, and Stella Artois; Beck’s, Hoegaarden, Leffe, and Michelob Ultra; and Aguila, Antarctica, Bud Light, Brahma, Cass, Castle, Castle Lite, Cristal, Harbin, Jupiler, Modelo Especial, Quilmes, Victoria, Sedrin, and Skol brands. Total revenue was $52,329 million in 2019.
Anheuser-Busch Is Not Generating Value for Small Investors
Anheuser-Busch has not been a great investment for small investors since the SABMiller acquisition. The stock price generally gained from 2010 until early-2016. The stock price peaked at slightly over $131 per share. But since then the stock price has been on a downward trend. The 52-week high is $102.7. The 52-week low is $32.58 Yes, the stock price bounced off the low. But it is still trading well off its highs at $45.95.
The combined decline in stock prices and the dividend cuts have led to poor total returns. The stock has declined (7.7%) over the past 10-years and even worse, it has declined (62.9%) over the past 5-years. For year-to-date, the stock is down about (-44%). An investment in a simple S&P 500 Index fund or a dividend index fund would have done better.
Anheuser-Busch Is Focusing on Debt Reduction
Much of this is arguably due to 3G Capital’s desire for scale to create a global brewer and the debt needed to build that scale. 3G Capital has majority ownership of AB InBev. The firm’s playbook can generally be described as make large and bold acquisitions then relentlessly cut costs and raise operating margins. Certainly, the SABMiller acquisition was large and bold. From a strategic perspective the acquisition likely makes sense. It gave AB InBev market leading share in North America and 70% market share in Brazil. Today, the company has five of the top ten beer brands and 18 brands with over $1B in sales. Major global brands include Budweiser, Stella Artois, and Corona. In addition, AB InBev has a virtual monopoly in Latin America since the company control about 62% of Ambev S.A. (ABEV).
Arguably though AB InBev took on too much debt that was not seemingly offset by enough growth opportunities from the SABMiller acquisition. Alcoholic beverage consumption tends to grow with time. The market for beer should grow in the low single digits over the next few years. But much of that recent growth has not been in mass produced beer. Rather it has been in craft beer, wine, and premium spirits. AB InBev has little exposure to those market segments. But with that said, the problem has not been growth since the company has taken the three global brands and expanded them into other geographies.
Deleveraging is Slow
Rather the main problem for ABInBev has been too much debt. The leverage ratio was over 6.5X and total debt was over $123 billion at end of 2016. Interest coverage was only about 2.8X. These were all high values. AB Inbev has made significant progress in reducing leverage and total debt. At end of 2019, the leverage ratio was down to about 4.7X and interest coverage was up to roughly 3.8X. Total debt was over $103 billion. This came about through six major asset sales required by regulators and also for deleveraging, as seen in the chart below. The most recent sale was Carleton & United Breweries to Asahi for approximately $11.3 billion in 2019.
Despite the deleveraging effort to date, AB InBev seemingly still has a mountain of debt to deal with in order to get the leverage ratio down to the long-term target of 2.0X. But the near-term challenges of the coronavirus-induced global economic slowdown is negatively impacting AB InBev. The company recently drew down its $9 billion revolving credit line. This adds short-term debt. But in general, many companies are trying to boost liquidity so one must look at this action in that context. However, this action raises the total debt amount and negatively impact debt ratios.
Coronavirus Impact on Anheuser-Busch InBev – Dividend Cut
The coronavirus is impacting almost every company. AB InBev is not immune to the global economic slowdown either. In fact, it may have higher exposure that most people think. Nightlife is at a standstill in many countries. Granted, many people are buying more retail alcohol. But AB InBev makes its money partly from sales in restaurants, casinos, hotels, sporting events, etc. These are all closed or canceled for the most part.
Eventually, restaurants and hotels will be reopened. But Bill Gates is likely correct with the statement,
“No one should think the government can wave a wand and all of sudden the economy is anything like it was before this happened.”
The recovery process will be long and drawn out. Consumers will likely continue practicing ‘social distancing’ and take time before returning to eating at restaurants. It will be 2021 before major sporting leagues and events return to normal operations. Hotels and casinos will operate below capacity for some time. All this will certainly reduce beer sales.
The extent of the impact on AB InBev in fiscal 2020 and even fiscal 2021 is not clear. But the company pulled its 2020 outlook on March 24, 2020. Specifically, the company stated:
“Since 27 February 2020, the scale and magnitude of COVID-19 has increased significantly, resulting in restrictions imposed on many customers, as well as other limitations and social distancing measures in many countries in mid-March.”
“Given the uncertainty, volatility and fast-moving developments of the pandemic in the markets in which AB InBev operates, the company is withdrawing that 2020 outlook in its entirety because of the impact of COVID-19,” it said.
Clearly, the top and bottom line will be impacted. The situation is fluid. Relaxation of restrictions in different countries is largely out of the company’s control.
Is Anheuser-Busch’s New Dividend Safer?
Is the new dividend safer after it was cut by Anheuser-Busch? That is seemingly a trick question after two cuts in about two years. In fiscal 2019, the dividend was reasonably well covered by earnings. But consensus 2020 earnings are now $2.43, and the new dividend is $0.54 per share (at current exchange rates). So, the forward payout ratio is 22.2%. This is a good value and well below my threshold of 65%.
Let’s check the dividend safety from the perspective of free cash flow. In fiscal 2019, operating cash flow was $13,935 million and capital expenditures were $5,174 million. If we assume a 25% hit to both then we have operating cash flow of $10,451 million and capital expenditures of $3,881 million. This gives free cash flow of $6,570 million. Last year the dividend cost
$5,015 million. Half that for fiscal 2020 is ~$2,508 million. So, the forward dividend-to-FCF ratio is approximately 38.2%, which is a decent value and below my criterion of 70%. So, yes, the new dividend is safer but with the caveat that AB InBev’s leverage is still high, interest coverage is still low, and the full impact of COVID-19 is not known at this time.
You can also read Six Flags (SIX): Dividend Is Suspended.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.