Updated on April 2nd, 2019 by Bob Ciura
Investors looking for companies that generate strong profits and pay dividends to shareholders should take a closer look at the major alcohol stocks.
These are companies that manufacture and distribute a variety of alcoholic beverages, including beer, wine, and liquor.
The top companies in this sector have many attractive qualities in common. They have strong brands, which give them pricing power.
And, thanks to their global distribution, they generate high cash flow, which allows them to pay dividends to shareholders.
All six stocks in this article can be found on our list of 350 consumer staples stocks that pay dividends to shareholders. You can download an Excel spreadsheet of all 350 dividend-paying consumer staples stocks by clicking the link below:
More information can be found in the Sure Analysis Research Database, which ranks stocks based upon the combination of their dividend yield, earnings-per-share growth potential and valuation changes to compute total returns.
This article will rank the top alcohol stocks, separated into two groups: beer stocks, and liquor stocks.
Beer Stock #1: Molson Coors (TAP)
- Expected Annual Returns: 12%
Molson Coors Brewing Company was founded in 1873. Since then, it has grown into one of the largest U.S. brewers.
It has a variety of brands including Coors Light, Coors Banquet, Molson Canadian, Carling, Blue Moon, Hop Valley, Crispin Cider, and Miller Lite through a joint venture called MillerCoors.
Source: Investor Presentation
In mid-February (2/12/19) Molson Coors reported fourth-quarter and full-year financial results for 2018. The fourth quarter was a disappointment for Molson Coors. Quarterly revenue of $2.4 billion declined 5% in constant currency year-over-year, and missed analyst estimates by $120 million.
This was a sizable miss for the quarter. On the plus side, adjusted earnings-per-share of $0.84 beat expectations by $0.05 per share. For 2018, adjusted earnings-per-share increased 12.5% to $5.04. The high rate of earnings growth was due to revenue growth, cost cuts, and a lower tax rate.
Molson Coors has fallen behind the trends in the U.S. beer industry, specifically the craft beer boom. There is a great deal of growth taking place for smaller breweries that produce craft beers. Molson Coors has a relatively small group of craft beers in its portfolio, which is a big reason for its lack of growth in recent periods.
Separately, the tariffs passed by the Trump administration could be a negative catalyst for Molson Coors’ earnings moving forward. Tariffs on aluminum imports from the European Union, Canada, and Mexico, are likely to elevate Molson Coors’ production costs.
Fortunately, with several top brands, Molson Coors could choose to pass these higher costs on to consumers to avoid the hit to the company’s margins.
And, Molson Coors has the most attractive valuation of the major brewers. Molson Coors stock trades for a price-to-earnings ratio of 12.2, based on 2019 earnings-per-share estimates. We view fair value as a price-to-earnings ratio of 15.0, which means Molson Coors stock could generate returns of 4.2% per year just from expansion of its valuation multiple.
In addition, we expect Molson Coors to generate annual earnings growth of 5% per year, and the stock has a 2.7% dividend yield. We expect total returns of approximately 12% per year, making Molson Coors the alcoholic stock with the highest expected returns.
Beer Stock #2: Ambev SA (ABEV)
- Expected Annual Returns: 8%-9%
Ambev SA is the successor of two of the oldest brewers in Brazil, Companhia Cervejaria Brahma and Companhia Antarctica Paulista Indústria Brasileira de Bebidas. Antarctica was founded in 1885, while Brahma was founded in 1888.
Today, Ambev operates as a producer and distributor of alcoholic beverages. Its main business is beer, with brands including Skol, Brahma, Antarctica, Quilmes, Labatt, Presidente, and more.
It also has smaller businesses in soft drinks and other non-alcoholic beverages, with brands such as Guarana Antarctica and Fusion. Currently, Ambev has operations in 16 countries, primarily in South America, Central America, and Latin America.
Source: Investor Presentation
On February 28th, 2019 Ambev released fourth-quarter and full year 2018 results. For the quarter, revenue came to $4.1 billion in U.S. dollars, based on year-end exchange rates. Sales grew 6.6% from the same quarter last year, as a 3.5% drop in volume was more than offset by the growth in revenue per hectoliter.
Normalized profit came in at $1.2 billion, a 17% decline due mostly to higher financial expenses. For the year Ambev reported revenue of $13.0 billion, up approximately 5% from the previous year. Normalized earnings-per-share declined roughly 4% to $0.19.
Ambev has a positive long-term growth outlook, due largely to its geographic focus on Central America and Latin America. These regions are home to many emerging economies, with rising middle classes and high rates of economic growth.
We are expecting approximately 6% annual earnings growth over the next five years. Earnings growth could be slightly offset by a declining valuation multiple.
Ambev stock trades for a 2019 price-to-earnings multiple of 21, slightly above fair value of 20. We believe this is a fair valuation estimate for the company. Ambev is a profitable company with leading brands all over the world.
As a result, contraction of the valuation multiple could reduce annual returns by approximately 1% per year. The stock has a dividend yield of 3.5%.
Ambev pays a current dividend of $0.15 per share (one ADS equals one ordinary share). Investors should note that because the dividend is paid in Brazilian currency, payment in U.S. dollars will fluctuate based on exchange rates.
The dividend appears to be secure, which provides a solid yield above 3% right now. While the stock is slightly overvalued at the present time, shareholders are still likely to see positive total returns over the next five years in the 8%-9% annual range.
Beer Stock #3: Anheuser-Busch InBev (BUD)
- Expected Annual Returns: 7%-8%
AB-InBev is the largest beer company in the world. In its current form, it is the result of the 2008 merger between InBev and Anheuser-Busch.
Today, it sells more than 500 beer brands, in more than 150 countries around the world. Some of its most popular brands include:
- Bud Light
- Stella Artois
Overall, AB-InBev has 18 individual beers that each generate at least $1 billion in annual sales.
AB-InBev has achieved its growth primarily through huge mergers with other beer companies. AB-InBev was first brought together by the $52 billion merger in 2008, between Interbrew from Belgium, AmBev from Brazil, and Anheuser-Busch from the U.S.
AB-InBev reported Q4 earnings on 2/28/19 and results were better than expected. Revenue increased 5.3% as the company saw revenue per hectoliter rise 4.9% while volumes rose just 0.3%. Beer volume was up slightly while non-beer volumes fell 4.9%, offsetting gains in the core business.
The company’s three global brands, Budweiser, Stella Artois, and Corona, produced a combined 9.8% top line gain in the fourth quarter, and a 12.6% gain outside of their respective home markets.
Source: Investor Presentation
Cost of sales increased 6.5% in Q4 and 6.0% on a per-hectoliter basis. However, merger synergies helped keep the bottom line move higher as the EBITDA margin moved up 118 basis points for the quarter.
Adjusted earnings-per-share rose slightly from $1.24 to $1.26 in the fourth quarter. Management guided for revenue and EBITDA growth in 2019 ahead of inflation.
AB-InBev cut its dividend late in 2018 thanks to its efforts to spend extra cash on debt reduction instead of a sizable dividend. We are forecasting a total payout of €1.80 per share for this year, which equates to ~$2.05 in U.S. dollars.
We expect AB-InBev to grow earnings-per-share by 5% per year over the next five years. Growth will be fueled by sales growth through higher prices and volumes, as well as margin expansion and share repurchases.
AB-InBev stock could be slightly overvalued now, and compression of the valuation multiple could reduce total returns by less than 1% per year.
Earnings growth and dividends can more than offset the slight overvaluation of the stock. Anheuser Busch InBev has a roughly 2.5% dividend yield. Combined with earnings growth and valuation changes, we expect total returns slightly above 7% per year through 2024.
Liquor Stock #1: Constellation Brands (STZ)
- Expected Annual Returns: 11%-12%
Constellation Brands was founded in 1945. The company produces and distributes beer, wine, and spirits. It has over 100 brands in its portfolio. It imports and sells beer brands such as Corona.
In addition, Constellation’s wine brands include Robert Mondavi and Clos du Bois. Its liquor brands include SVEDKA Vodka, Casa Noble Tequila, and High West Whiskey.
In the most recently reported quarter, Constellation Brands reported sales growth of 9%, along with adjusted earnings-per-share growth of 18%.
The company expects earnings-per-share of $13 at the midpoint of 2019 guidance. It is expected to continue generating growth in the years ahead, largely due to its premiumization strategy.
Source: Investor Presentation
One of the biggest reasons for Constellation Brands’ impressive growth in recent years, is its focus on the premium segment, which continues to grow. According to the company, growth rates in the high-end market of spirits, wine, and beer are much higher than lower-priced categories.
Premium alcoholic beverages also carry pricing power, a key driver of revenue and earnings growth.
Constellation Brands has a number of competitive advantages. Its long list of strong brands gives the company steady demand. It has six of the top 15 imported U.S. beer brands, and 19 of the 100 top-selling wine brands. Its strong distributor network provides an effective route-to-market for the company’s strategy in premium categories.
Another benefit of Constellation Brands’ business is that it can withstand recessions very well. Alcoholic beverages are generally resistant to recessions. Consumers tend to drink as much (or more) beer, wine, and spirits when the economy is in a downturn.
Constellation Brands trades for a price-to-earnings ratio of 18.3, which is slightly above our fair value estimate of 18.0. A declining valuation could reduce total returns by 0.3% per year, over the next five years.
However, we expect Constellation Brands stock to grow earnings by 10% per year over the next five years, made up of volume growth, price increases, and share repurchases. In addition, the stock has a current dividend yield of 1.7%.
Even though we believe the stock is slightly overvalued, total returns are expected to reach 11%-12% per year.
Liquor Stock #2: Diageo PLC (DEO)
- Expected Annual Returns: 6%-7%
Diageo traces its roots all the way back to the 17th century and the Haig family, the oldest family of Scotch whiskey distillers. Today, Diageo manufacturers some of the most popular spirits and beer brands in the world, such as Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, Guinness, Crown Royal, Ketel One, and many more.
In all, Diageo has 20 of the world’s top 100 spirits brands.
In late January (1/31/19) Diageo released financial results for the first half of fiscal 2019. Net sales increased 5.8% to $9.03 billion. Excluding currency fluctuations, organic revenue increased 7.5% as volumes increased 3.5%.
Diageo’s organic sales growth accelerated over the fiscal 2019 first half, as compared to previous six-month periods.
Source: Investor Presentation
Price increases and favorable product mix helped lift organic operating profit by 12.3% for the six-month period. Adjusted earnings-per-share increased 14% through the first half.
The company generated a very strong return on invested capital of 18.5%, up 130 basis points from the same six-month period a year ago.
We estimate 8% annual earnings growth through 2024, comprised of mid-single-digit organic revenue growth, margin expansion, and share repurchases.
However, Diageo stock seems to be overvalued. Shares of Diageo currently trade for a price-to-earnings ratio of 24.4, considerably above the 10-year average valuation of 18.3, which is our estimate of fair value. This means a declining price-to-earnings ratio could reduce total returns by 5.6% per year moving forward.
Fortunately, the stock can offset this with earnings growth and dividends. Diageo pays a semi-annual dividend, and increases the dividend regularly. The current dividend yield is approximately 2.2%.
We expect 6.5% annual returns for Diageo stock over the next five years, consisting of 8% earnings growth, a 2.2% dividend yield, and negative returns of 5.6% per year from valuation compression.
The pronounced impact of overvaluation means Diageo stock is not expected to generate a high rate of return over the next five years. Diageo is a great business, but the relatively high price does not represent a buying opportunity.
Despite Diageo’s strong brands and competitive advantages, the stock appears to be overvalued and does not earn a buy recommendation at this time.
Liquor Stock #3: Brown-Forman (BF-B)
- Expected Annual Returns: 3.0%-4.0%
Brown-Forman has an impressive history of dividend growth. It has increased its dividend for over 30 years in a row. It is a Dividend Aristocrat, an exclusive group of 57 high-quality stocks with 25+ consecutive years of dividend growth.
Brown-Forman’s long dividend growth history is due to its strong brands. It has a large product portfolio, which is focused on whiskey, vodka, and tequila.
Its most famous brand is its flagship Jack Daniel’s. Other popular brands include Herradura, Woodford Reserve, El Jimador, and Finlandia.
Brown-Forman reported its third quarter (fiscal 2019) earnings results on March 6. Revenue of $904 million was 3% higher than the same quarter the previous year. Operating income rose 4% during the first three quarters of fiscal 2019, while its earnings-per-share were up by an even better 12% in that period.
Company management guides for earnings-per-share of $1.65 to $1.75 during fiscal 2019, which represents a slight increase versus 2018. Profit growth remains under pressure from cost inflation, as higher raw material and transportation costs are eroding margins.
We expect approximately 8.8% annual earnings growth for Brown-Forman over the next five years. In addition, the stock pays a 1.3% dividend yield.
Despite a positive growth outlook and a decent dividend yield, Brown-Forman’s expected returns are quite low due to significant overvaluation.
Brown-Forman stock trades for a price-to-earnings ratio of 31.5, which is well above our fair value estimate of 22. As a result, we expect the valuation to compress over the next five years, which could reduce total returns by 6.9% per year.
The combination of earnings growth, dividends, and valuation changes is expected to result in annual returns of just 3.2% per year. This is a fairly weak rate of return.
Even though Brown-Forman is a Dividend Aristocrat with a long history of dividend increases, the very high stock valuation and low dividend yield make the stock a fairly unattractive pick for value or dividend investors.