Molson Coors Beverage Company (TAP) unexpectedly suspended its dividend during the COVID-19 pandemic and recession. This action probably went against conventional wisdom and expectation, considering that alcohol sales generally do well during times of economic distress. For instance, alcohol sales climbed from 2008 – 2009 during the Great Recession despite a significant uptick in unemployment. In addition, people may change brands or locales, but they tend to keep consuming alcohol even during times of economic distress. At least in the past. However, the coronavirus pandemic was different for Molson Coors and its larger competitor Anheuser-Busch InBev (BUD), which cut its dividend. As a result, Molson Coors suspended its dividend, which was an annual $2.28 per share at the time. Most companies are trying to maintain liquidity and strengthen the balance sheet, and Molson Coors is no exception.
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Overview of Molson Coors
Molson Coors traces its founding to three iconic breweries. Molson Brewery was started in 1786 in Montreal, Canada. Miller Brewing was founded in 1855 in Milwaukee, Wisconsin. Coors Brewing Company was started in 1873 in Colorado. The company is currently headquartered in Golden, Colorado, and Montreal, Canada. Molson and Coors merged in 2005, becoming the Molson Coors Brewing Company. In 2007, Molson Coors and SABMiller formed a joint venture in the U.S. The current company results from the $12 billion cash acquisition of SABMiller’s economic and voting interest in MillerCoors plus international rights for Miller. This acquisition made the brewer one of the largest in the world. The company has dozens of brands, including several that they license from other brewers. Brands include Miller, Coors, Molson, Coors Light, Miller Genuine Draft, Miller Lite, Miller High Life, Blue Moon, Singha, Pilsner Urquell, Zima, Olde English, Milwaukee’s Best, and others.
The company is controlled by the Coors and Molson families through a dual-share structure. The families own almost all the Class A shares, while the Class B shares trade on the New York Stock Exchange or NYSE. The company had $10,579 million in revenue in 2019.
Molson Coors Dividend
As dividend growth stocks go, Molson Coors history is a little choppy. That said, the company has paid a continuous dividend since 1989. The dividend was flat for many years and was raised in 1997. Since then, the dividend has trended up but has not been raised every year. Before the pandemic, the brewer had a target dividend value of 20% to 25% of trailing 12-month EBITDA. The quarterly regular cash dividend was $0.57 per share before the suspension. In 2019, the dividend yield was about 3.4%, and the payout ratio was roughly 43%, which is sustainable in normal times.
Molson Coors Suspended Dividend
Molson Coors dividend was suspended in an announcement on May 22, 2020, in response to the challenges of the coronavirus pandemic. The initial announcement was made in a Form 8-K filing with the Securities and Exchange Commission or SEC. The Form 8-K filing from the company stated:
“On May 21, 2020, the Board determined that it will suspend its regular quarterly dividends on its Class A and Class B common shares otherwise payable in the 2020 fiscal year. In addition, Molson Coors Canada Inc. also determined on May 21, 2020 that it will suspend its regular quarterly dividends on its Class A and Class B exchangeable shares payable in the 2020 fiscal year.”
The Form 8-K filing also stated:
“The Board’s decision to suspend the dividend follows a number of other steps the Company has taken in recent weeks with the aim of protecting and bolstering the Company’s liquidity position in response to the global economic uncertainty created by the Coronavirus pandemic…”
From the Q2 2020 earnings call transcript the company stated:
“And last but certainly not least we strengthened our financial position. We renegotiated our bank covenants to help ease potential short-term liquidity constraints and we suspended our dividend payable for the balance of the 2020 fiscal year, decision that we believe will put us in a stronger cash and leverage position during the pandemic. In light of these steps, we were pleased that Moody’s affirmed our credit rating and kept our outlook stable.”
“In June 2020, we entered in the main RCF which favorably revises the leverage ratios under the financial maintenance covenants for the next six fiscal quarters starting with June 30, 2020. Our near term liquidity position was further improved by Board decision in May to suspend quarterly dividend for the remainder of the 2020 fiscal year, as well as the benefits of the CapEx and cost reductions discussed on our first quarter call.”
Coronavirus Impact on Molson Coors
Alcoholic beverage companies have been suffering because local government restrictions and social distancing severely impacted revenue. Additional sales for the at-home market did not offset this. For example, second-quarter volumes were down -11.6%, and revenue was down -15.3% on a year-over-year basis.
In fact, most alcoholic beverage companies focusing on beer have higher exposure than expected. Sports venues, bars, restaurants, food service, casinos, and nightlife, in general, were closed and then reopened after several weeks to a couple of months. Even today, many of these businesses are operating under capacity restrictions. This fact means that sales of beer will be less than pre-pandemic levels for the foreseeable future.
When local government restrictions are lifted, and consumers do not practice social distancing, the real problem is that new infection rates will increase. This fact will limit the recovery of end markets for alcoholic beverage companies. The recovery process will likely be lengthy and drawn out. At this point, it is clear that normal activity for end markets will not occur until at least 2021.
When Will the Dividend Be Reinstated by Molson Coors?
I do not expect the dividend to be reinstated in 2020. The dividend may be reinstated in 2021, depending on the debt. The main problem faced by the company besides lower sales is high long-term debt and leverage. Molson Coors took on debt to acquire SABMiller. Total debt was at a high in 2016 at over $12 billion. By the end of 2019, total debt was down to just over $9 billion. Leverage, which was over 4X, is now down to about 3.5X. The company continues to pare debt and bring down leverage. I expect that as the leverage ratio drops to 3X or lower, the dividend may be reinstated, assuming that sales stabilize and recover.
Final Thoughts on Molson Coors Suspended Dividend
Molson Coors is not the market leader (24% in North America behind Anheuser-Busch’s 42%) in beer and does not have the highest margins. The brewer also does not have too many premium or super-premium brands that are growing comparatively fast. Most of its legacy brands face declining volumes. On a positive note, though, Molson Coors is partnering with Coca-Cola (KO) in the latter’s push into hard seltzer with the Topo Chico brand. Hard seltzer now accounts for 10% of all beer sales and is growing rapidly. Further, the brewer is partnering with Yuengling. The company is also seemingly moving into non-alcoholic beverages. These moves may drive top-line gains. But still, Molson Coors faces competitive markets in alcoholic drinks, and it is not a strong player in non-alcoholic beverages.
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Overall, despite the possibility of a dividend reinstatement, I view Molson Coors as a work in progress. As a result, if you are interested in alcoholic beverage companies that pay dividends, there are probably better choices.
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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.