Dividend Aristocrats in Focus Part 49: Brown-Forman - Sure Dividend Sure Dividend

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Dividend Aristocrats in Focus Part 49: Brown-Forman


Published November 23rd, 2016 by Bob Ciura

Brown-Forman (BF-B) may not be a household name. But there is a good chance many households have consumed one of the company’s products.

Its most famous brand is its flagship Jack Daniels whiskey. Other popular brands include Herradura and El Jimador tequila and Finlandia vodka.

Brown-Forman has a rich company history. In fact, this year marks the 150th year of the Jack Daniel Distillery.

Jack Daniel’s Tennessee Whiskey got its start all the way back in 1865, when Jack Daniel purchased Cave Spring Hollow. The following year, he registered the Jack Daniel Distillery, which stands today as America’s oldest registered distillery.

Brown-Forman is a Dividend Aristocrat. It has increased its dividend for 33 years in a row, including a very recent 7.4% hike. The company has paid dividends for 71 years in a row.

You can see the entire list of Dividend Aristocrats here.

This article will detail the investment prospects for Brown-Forman stock moving forward.

Business Overview

Brown-Forman is a global alcoholic beverages company. It has many familiar brand names across whiskey, scotch, tequila, vodka, and wine.

bfb-brands

Source: 2015 Barclays Global Consumer Staples Conference, page 3

Brown-Forman is one of a group of companies, commonly referred to as ‘sin’ stocks. These are companies in the alcohol, tobacco, and gaming industries. They sell products that are generally viewed as detrimental to a consumer’s health.

At the same time, these have been some of the most rewarding stocks to own over the long term. The reason is because alcohol and tobacco are highly profitable industries.  The gaming industry is very profitable as well, but has historically not been as beneficial for shareholders.

The overall business climate for Brown-Forman is very strong. Last year, its sales and earnings-per-share increased 5% and 8%, respectively. These figures exclude the impact of foreign exchange fluctuations.

The strong U.S. dollar is weighing down Brown-Forman. But it is still seeing strong demand for its products, particularly in spirits.

This is why Brown-Forman is restructuring its portfolio, but not in the way you might expect. Many global consumer-oriented companies are diversifying their product offerings right now in an attempt to generate growth.

But Brown-Forman is taking the opposite approach. It has actually repositioned its brand portfolio to become much more focused on spirits. It is aggressively moving away from wine and consumer durables.

bfb-portfolio

Source: 2015 Barclays Global Consumer Staples Conference, page 6

Going forward, Brown-Forman intends to focus on its flagship whiskey brands to fuel growth.

There is good reason for this strategy. According to the company’s 2015 annual report, Jack Daniel’s Tennessee Whiskey has delivered 7% compound annual volume growth since 1956,

The company has made international expansion of its core brands into a key strategic imperative. But this strategy should work well over the long term.  And the long-term is what matters.

Growth Prospects

The U.S. market is a highly competitive and saturated industry. In the alcohol industry, small ‘craft’ breweries are growing. But large alcohol companies are struggling to grow organically in the U.S.

Therefore, Brown-Forman intends to grow by expanding into new markets. Approximately 57% of its annual sales now come from outside the U.S.

bfb-geographic-diversification

Source: 2015 Barclays Global Consumer Staples Conference, page 7

One way it is doing this is through acquisitions. For example, the company recently acquired Scotland-based BenRiach Distillery Company.

This acquisition provides Brown-Forman with a more significant presence in the high growth single-malt whiskey segment.

When it comes to the U.S., there is still a path for growth. It will likely come in American whiskey, which is one of the highest-growth domestic alcohol categories.

bfb-american-whiskey

Source: 2015 Barclays Global Consumer Staples Conference, page 12

Younger adult consumers, particularly Millenials, are drinking more whiskey relative to other alcohol categories. This explains the accelerating growth of whiskey consumption in the U.S. in recent years.

These efforts are working well for the company. Last quarter, Brown-Forman generated 2% underlying sales growth. That was a fairly solid performance in a challenging macro-economic climate. There is heightened economic uncertainty across the world.

Nevertheless, the company still projects 4%-6% revenue growth this fiscal year.

Competitive Advantages & Recession Performance

The main competitive advantage for Brown-Forman lies in its scale. One reason why sin stocks typically generate large amounts of cash flow is because they benefit from economies of scale.

This is thanks to their distribution capabilities, and the resulting cost advantages they hold over smaller competitors. Brown-Forman has low capital expenditures, which results in lots of free cash flow.

It also generates pricing power from its brand strength. Brown-Forman realized 4% revenue growth last year from price increases.

An excellent global distribution network and pricing power led to 23% return on invested capital last fiscal year.

The company then returns a great deal of cash to shareholders through dividend growth and stock buybacks.

Brown-Forman performed exceptionally well during the Great Recession. Of course, this is because alcohol is a recession-resistant product. One could argue that alcohol manufacturers actually perform better during tough economic times, as consumers seek relief of their stress.

The company’s earnings-per-share through the Great Recession of 2007 to 2009 are shown below:

Brown-Forman had record earnings-per-share every year through the Great Recession.  While it may not be beneficial for people to drink more when economic times get tough, that appears to be what happened through the Great Recession.

Valuation & Expected Total Return

Brown-Forman stock trades for a price-to-earnings ratio of 18. This is slightly below the S&P 500. The broader index trades for an average price-to-earnings ratio of 25.

As a result, the stock seems slightly undervalued. It could generate positive returns for shareholders from expansion of the price-to-earnings ratio.

Aside from multiple expansion, future returns will be made up of earnings-per-share growth. A breakdown of future earnings-per-share growth could be as follows:

Under these assumptions, future expected returns would be  around 8.5%-10.5% annualized.

Final Thoughts

Brown-Forman has an extremely long operating history. It has achieved steady growth for decades, thanks largely to its strong brands.

In turn, it has rewarded investors with high dividend growth each year.

Brown-Forman has a low current dividend yield, which may not be attractive to investors looking for high levels of income right now.

But its fairly high growth rates mean the stock is a much more attractive choice for total return investors.


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