Updated on November 17th, 2020 by Bob Ciura
Investors looking for companies that generate strong profits and pay dividends 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 industry have many attractive qualities. They have popular brands, which give them pricing power and strong cash flow. This allows them to pay dividends to shareholders. Alcohol stocks also tend to perform well during periods of economic downturns, meaning they can provide diversification and recession-resistance to a portfolio.
To the point, one alcohol stock even makes the exclusive Dividend Aristocrats list, an elite group of S&P 500 stocks with 25+ years of rising dividends.
There are currently 65 Dividend Aristocrats. You can download an Excel spreadsheet of all 65 (with metrics that matter such as dividend yields and payout ratios) 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 by forecast total returns for the next five years.
Table of Contents
The top alcohol stocks are listed here, according to annual expected returns over the next five years. Stocks are ranked in order of expected returns, from lowest to highest.
- Brown-Forman (BF-B)
- Ambev SA (ABEV)
- Anheuser-Busch InBev (BUD)
- Constellation Brands (STZ)
- Diageo PLC (DEO)
- Molson Coors (TAP)
Alcohol Stock #6: Brown-Forman (BF-B)
- Expected Annual Returns: -3.9%
Brown-Forman has an impressive history of dividend growth. The company has paid a dividend to shareholders for 75 consecutive years. It has increased its dividend for 36 years in a row, making it a Dividend Aristocrat.
Brown-Forman’s long dividend growth history is due to its strong brands and recession resiliency. 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 first-quarter (fiscal 2021) earnings results on September 2. Revenues of $750 million were down 2% year-over-year, but did beat analyst estimates by $62 million. However, excluding currency impacts, underlying organic sales increased 3%.
Earnings-per-share totaled $0.67 for the first quarter, again beating consensus by $0.37. The quarter’s profits were up 73%, although adjusted earnings-per-share were up only marginally from the same quarter last year. First-quarter results by geographic segment, compared with March and April, can be seen in the image below:
Source: Investor presentation
Brown-Forman has a strong growth track record. From 2010 through 2019, Brown-Forman grew its earnings-per-share by a solid pace of 7%. Earnings-per-share were driven by a combination of several factors, including revenue growth, rising margins, and a declining share count.
We expect approximately 7% annual earnings growth for Brown-Forman over the next five years. In addition, the stock offers a 0.9% dividend yield. Despite a positive growth outlook and a dividend payout, we continue to rate Brown-Forman a sell due to persistent overvaluation.
Brown-Forman stock trades for a price-to-earnings ratio of 45 based on our 2020 EPS estimate of $1.80 per share. This is well above our fair value estimate of 24. As a result, we expect the valuation to compress over the next five years, which could reduce total returns by 11.8% per year through 2025.
We expect the stock to generate negative annual returns of -3.9% per year over the next five years, as the impact of overvaluation is expected to more than offset EPS growth and dividends. This makes Brown-Forman stock a sell in our view.
Even though Brown-Forman is a Dividend Aristocrat with a long history of dividend increases, the very high valuation and low dividend yield make the stock an unattractive pick for value or dividend investors.
Alcohol Stock #5: Ambev SA (ABEV)
- Expected Annual Returns: -1.0%
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.
Ambev performed surprisingly well in the 2020 third quarter, with net revenue growth of 15% due to 12% volume growth and 2.8% revenue-per-hectoliter growth. Growth was spread across geographic markets, with 21% growth in Brazil, 15% in Latin America South, 6.4% in Canada, and 1.9% in the Central America & Caribbean segment.
The third quarter was a stark improvement from the first two quarters of the year, buoying investors’ hopes that the worst is behind Ambev.
Source: Investor Presentation
We believe 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. However, the coronavirus remains a major source of uncertainty.
We are expecting approximately 3% annual earnings growth over the next five years. Ambev stock trades for a 2020 price-to-earnings multiple of 24.5, above our estimate of fair value at 20 times earnings. This shows that the stock appears to be somewhat overvalued. A declining valuation multiple could reduce annual returns by 4% per year over the next five years.
In December 2019, Ambev declared an annual dividend payout equating to ~US$0.087 per share using current exchange rates. Investors should note that because the dividend is declared in Brazilian currency, payment in U.S. dollars will fluctuate based on exchange rates. Based on the 2019 payout, the stock has a yield of 3%, but the company has not paid dividends in 2020. Therefore, shareholders should not assume Ambev will be a suitable stock for dividend income.
Based on expected earnings growth and valuation changes, Ambev looks poised to deliver total returns of -1% per year over the next five years. We rate the stock a sell due to its negative expected returns and lack of a dividend.
Alcohol Stock #4: Anheuser-Busch InBev (BUD)
- Expected Annual Returns: 1.6%
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 Budweiser, Bud Light, Corona, Stella Artois, Beck’s, Castle, and Skol.
Overall, AB-InBev has 17 individual beers that each generate at least $1 billion in annual sales. You can see a detailed analysis of AB-InBev’s 17 billion-dollar brands here.
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 Q3 earnings on 10/30/20 and results reflected the intense damage done by the coronavirus crisis. Revenue of $12.82 billion increased 4% year-over-year, but beat expectations by $1.2 billion. Adjusted EPS of $0.79 also beat estimates, by $0.02 per share. Revenue grew by 4.0% in the third quarter, driven by modest volume growth and revenue-per-hectoliter growth of 2.3%.
BUD’s three core global brands led the way for the company last quarter.
Source: Investor Presentation
The company decided to forgo the interim 2020 dividend payment, and will announce a decision on its full-year 2020 dividend along with the full fiscal year results on February 25th 2021.
We expect AB-InBev to grow earnings-per-share by 3% per year over the next five years. Growth will be fueled by sales growth through higher prices and volumes, as well as share repurchases. Shares trade for 19.3 times our 2020 earnings estimates, which is above our estimate of fair value at 18 times earnings. We therefore think annual returns will be negatively impacted by 1.4% annually due to a contracting valuation multiple.
This should create expected total returns at 1.6% per year through 2025, which is not high enough to warrant a buy recommendation at this time.
Alcohol Stock #3: Constellation Brands (STZ)
- Expected Annual Returns: 2.3%
Constellation Brands was founded in 1945, and today, it produces and distributes beer, wine, and spirits. It has over 100 brands in its portfolio, including 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.
On October 11th, 2020 Constellation Brands reported second-quarter results for the period ending August 31st, 2020. For the quarter the company recorded $2.26 billion in net sales, representing a -3.6% decline compared to Q2 2020 as beer sales were down slightly and Wine and Spirits declined -11%. Operating income equaled $798 million, a 1% increase. Earnings-per-share totaled $2.76 on a comparable basis versus $2.72 in the year ago period. Excluding Canopy Growth, EPS would have equaled $2.91.
The company withdrew full-year guidance as many other companies have done, because of the coronavirus. Constellation, however, 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 also competes in all three categories because spending per consumer is much higher for those that drink all three types of alcoholic beverages. Constellation’s strategy is to capture the market share of the most valuable consumers.
It is also expanding into new product categories to appeal to changing consumer preferences. An example of this is the August 2017 acquisition of Funky Buddha, which included a portfolio of craft beers to add exposure to the high-growth craft beer segment of the U.S. beer market. In 2018, Constellation Brands acquired Four Corners Brewing, and recently Constellation Brands invested $4 billion in cannabis producer Canopy Growth (CGC) giving it a 38% ownership stake.
Constellation Brands trades for a price-to-earnings ratio of 22.3, which is above our fair value estimate of 18.0. A declining valuation could reduce total returns by 4.2% per year over the next five years. We also expect Constellation Brands stock to grow earnings by 5% per year over the next five years, comprised of volume growth, price increases, and share repurchases.
In addition, the stock has a current dividend yield of 1.5%. Constellation Brands is expected to generate total returns of 2.3% per year through 2025, which is not high enough to warrant a buy recommendation at this time.
Alcohol Stock #2: Diageo PLC (DEO)
- Expected Annual Returns: 3.0%
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.
Diageo released earnings results for fiscal year 2020 on 8/4/2020. Net sales decreased 8.7% to $13.9 billion. Much of this decline was attributed to the impact from COVID-19. Organic sales fell 8.4%, as 2% growth in North America was more than offset by weakness in all other regions. Asia was the weakest region with a 16% sales decline while Europe and Turkey fell 12%.
Source: Investor Presentation
Organic volumes decreased more than 11% company-wide. Organic sales for beer decreased 15% while Scotch was lower by 17%. Canadian Whisky had 8% growth, but the majority of global brands were weaker during the second half. Johnnie Walker sales declined 22%, while Guinness dropped 16%.
Diageo retired $1.4 billion worth of stock during the first half of the year, but paused plans to buyback additional shares during the second half of the fiscal year. The company had projected share repurchases of $5.6 billion through fiscal 2022.
We estimate 8% annual earnings growth through 2025, comprised of mid-single-digit organic revenue growth, margin expansion, and resumption of share repurchases.
Diageo shares currently trade for a price-to-earnings ratio of 26.6, slightly above our estimate of fair value at 18.3. This implies negative returns of 7.2% from a declining P/E ratio.
Diageo pays a semi-annual dividend, and increases the dividend regularly. The annual dividend for fiscal 2020 came to US$3.55 (1 ADR equals 4 ordinary shares) resulting in a dividend yield of 2.2%.
We expect 3.0% annual returns for Diageo stock over the next five years. Diageo’s stock isn’t necessarily cheap, as it trades above our fair value estimate. Still, the stock should generate positive returns thanks to earnings growth and dividends. Thus, we rate the stock a hold.
Alcohol Stock #1: Molson Coors (TAP)
- Expected Annual Returns: 6.3%
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 the Miller beer brands.
On October 29th, 2020 Molson Coors reported Q3 2020 results for the period ending September 30th, 2020. For the quarter the company generated $2.75 billion in sales, down 3.1% compared to Q3 2019. Net sales were down 1.0% in North America and 12.2% in Europe. North America was the strongest geographic market for Molson Coors.
Source: Investor Presentation
During the quarter Molson Coors recorded net income of $342.8 million or $1.58 per share compared to a $402.8 million loss (-$1.86 per share) in the year ago quarter. On an adjusted basis, net income equaled $350.8 million or $1.62 per share compared to $321.2 million or $1.48 per share in Q3 2019.
The company withdrew full-year guidance amid the uncertainty surrounding the pandemic, and also suspended itsdividend.
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 years. The company is focused on growing its core brands once more, by investing in its existing brands and making acquisitions.
Molson Coors has one of the most attractive valuation of the major alcohol stocks. Molson Coors stock trades for a price-to-earnings ratio of 12.5, based on 2020 earnings-per-share estimates of $3.60. We view fair value as a price-to-earnings ratio of 14.0, which means Molson Coors stock could generate returns of 2.3% per year just from expansion of its valuation multiple.
In addition, we expect Molson Coors to generate annual earnings growth of 4% per year, resulting in total expected returns of 6.3% per year. We do not recommend the stock to income investors as the company has suspended its dividend.
The stock market has been extremely volatile to begin 2020. Many alcohol stocks were hit hard as the coronavirus crisis unfolded, but some have come back significantly in recent weeks. For value and income investors, the recovery in alcohol stocks has reduced the number of buying opportunities due to rising valuations and declining dividend yields.
Still, the world’s best alcohol manufacturers have strong brands, and generate high cash flow that is used for growth investment as well as cash returns to shareholders.
It is also valuable for investors that alcohol stocks are likely to be among the best-performers if a recession does occur. Consumption of alcoholic beverages will stay steady–and could even increase–in a recession. A sustained recovery from the coronavirus would be a major benefit for the biggest alcohol manufacturers.