Updated on May 18th, 2020 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 industry 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. They also tend to perform quite well during periods of economic distress, 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 66 Dividend Aristocrats. You can download an Excel spreadsheet of all 66 (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)
- Constellation Brands (STZ)
- Diageo PLC (DEO)
- Anheuser-Busch InBev (BUD)
- Molson Coors (TAP)
- Ambev SA (ABEV)
Alcohol Stock #6: Brown-Forman (BF-B)
- Expected Annual Returns: -2.4%
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 thanks to its long dividend history.
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 Q3 earnings on March 4th, 2020, with both top and bottom line results missing expectations slightly. For the first nine months of the year, net sales were up 3% to $2.7 billion, which was also +3% on an organic basis. Reported operating income fell 1% to $904 million, also down 1% on an organic basis. Diluted earnings-per-share, however, rose 4% to $1.45 thanks to a lower share count.
Management provided updated earnings-per-share guidance of $1.75 to $1.80 for the year, which is slightly below consensus estimates. The company felt lowering guidance was the prudent thing to do in light of the coronavirus outbreak globally, and now expects low-single-digit net sales growth, along with flat or modestly declining operating income.
Source: Investor presentation, page 9
The decline in operating profit is from lower gross margins, which, as you can see above, is due primarily to higher cost of goods as well as tariffs. These are largely out of the company’s control, but have dampened earnings growth for 2020 nonetheless.
We expect approximately 7% annual earnings growth for Brown-Forman over the next five years. In addition, the stock offers a 1.0% 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 38, 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 10.4% per year through 2025.
The combination of earnings growth, dividends, and valuation changes is expected to result in negative annual returns of approximately 2.4% per year. 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. Given the enormous turmoil in the stock market in the early part of 2020, there are numerous bargains to be found, making Brown-Forman seem even less attractive on a relative basis.
Alcohol Stock #5: Constellation Brands (STZ)
- Expected Annual Returns: 5.0%
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 April 3rd, 2020 Constellation Brands reported Q4 and fiscal year 2020 results for the period ending February 29th, 2020. For the quarter Constellation Brands recorded $1.903 billion in net sales, representing a 6% improvement compared to Q4 of last year, led by a 7.2% increase in beer shipping volumes and an 8.9% increase in net beer sales.
Reported earnings-per-share equaled $2.06, however this included losses attributable to Canopy Growth. Adjusted earnings equaled $2.18 compared to $1.90 previously. For the year Constellation Brands generated revenue of $8.344 billion, representing 3% year-over-year improvement, led by a 6.1% increase in beer shipment volumes and an 8.1% increase in net beer sales. Earnings-per-share equaled $9.12 or $9.89 excluding Canopy versus $9.34 previously.
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.
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 19.8, which is above our fair value estimate of 18.0. A declining valuation could reduce total returns by 1.9% 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 1.9%. Constellation Brands is expected to generate total returns of 5% per year through 2025.
Alcohol Stock #4: Diageo PLC (DEO)
- Expected Annual Returns: 8.4%
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 reported first half results on January 30th, and results showed revenue gaining year-over-year by about 4%.
Source: Investor presentation, page 3
The top line was driven by organic growth of 4%, as organic volume was roughly flat, but pricing and mix contributed strongly. In addition, Diageo saw net sales gain on an organic basis in all of its operating regions.
Operating profit was up 4.6%, driven by higher sales, productivity benefits, and strong pricing and mix. This was partially offset by unfavorable currency exchange, exceptional operating items, as well as acquisitions and divestitures. Earnings-per-share rose 4.2% year-over-year. The company also increased its dividend by 5% in local currency.
Diageo recently updated investors that it expects the coronavirus outbreak to reduce fiscal 2020 organic net sales by £225 million to £325 million, but added that actual results could come in better or worse from this forecast, depending on how the situation unfolds over the coming months.
We estimate 8% annual earnings growth through 2025, comprised of mid-single-digit organic revenue growth, margin expansion, and share repurchases.
Even after the recent turmoil in the market, Diageo shares are still just fairly valued. Shares currently trade for a price-to-earnings ratio of 20.3, slightly above our estimate of fair value at 18.3 times earnings. This implies negative returns of 2.1% from a declining P/E ratio, but with a market that is full of very cheap stocks, Diageo stands out as relatively unattractively valued.
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 2.5%. We expect 8.4% annual returns for Diageo stock over the next five years, consisting of 8% earnings growth, a 2.5% dividend yield, and negative returns of 2.1% per year from valuation compression.
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 #3: Anheuser-Busch InBev (BUD)
- Expected Annual Returns: 14.0%
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 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 Q1 earnings on 5/7/20 and results reflected the intense damage done by the coronavirus crisis. Total volume declined by 9.3%, while revenue declined by 5.8%. EBITDA declined 13.7% to $3.95 billion. The company’s three global brands, Budweiser, Stella Artois, and Corona, collectively posted a revenue decline of 11% globally for the quarter.
AB-InBev warns investors that results will worsen in the second quarter, compared with the first quarter. Still, the company believes it can navigate the crisis, thanks to its strong brands and industry-leading profit margins.
Source: Investor Presentation
The company also cut its dividend for the second time in the past two years. AB-InBev cut its dividend late in 2018 in an effort to spend extra cash on debt reduction instead of a sizable dividend. On April 14th, AB-InBev cut its final 2019 dividend payout by 50%. This dividend reduction saved the company roughly $1.1 billion, which will help further with debt repayment.
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 are down ~50% year-to-date, which has created a significant value proposition, in our view. Shares trade for 12.4 times our 2020 earnings estimates, which is far below our estimate of fair value at 18 times earnings. We therefore think positive returns will be boosted by 7.7% annually due to a rising valuation multiple.
Earnings growth and dividends will combine for a mid-single-digit return and combined, should create expected total returns at 14% per year through 2025.
Alcohol Stock #2: Molson Coors (TAP)
- Expected Annual Returns: 14.6%
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 April 30th, 2020 Molson Coors reported Q1 2020 results for the period ending March 31st, 2020. For the quarter the company generated $2.10 billion in sales, representing an -8.7% decline compared to Q1 2019. The North American segment saw -7.4% lower sales, while Europe posted a -15.5% decline. During the quarter Molson Coors posted a loss of -$117 million or -$0.54 per share compared to a profit of $151.4 million or $0.70 per share in the year ago period.
Source: Investor Presentation
On an adjusted basis, earnings equaled $77.0 million ($0.35 per share) compared to $112.7 million ($0.52) previously. Results were significantly impacted by the coronavirus pandemic. Molson Coors also withdrew full-year guidance amid the uncertainty surrounding the pandemic.
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.
The company is focused on growing its core brands once more, and although growth is still negative for Coors Light, and only slightly positive for Miller Lite, Molson Coors is committed to investing in those brands and returning them to growth. Early results have been positive, but there is much work to do.
Fortunately, with several top brands, Molson Coors has been able to maintain strong pricing power, and we expect this to continue to help grow margins over time.
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 11.7, based on 2020 earnings-per-share estimates that have been reduced due to the projected impact of the coronavirus outbreak. We view fair value as a price-to-earnings ratio of 14.0, which means Molson Coors stock could generate returns of 3.7% 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 5.9% dividend yield. We expect total returns of nearly 15% per year, making Molson Coors a buy.
Alcohol Stock #1: Ambev SA (ABEV)
- Expected Annual Returns: 16.1%
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 May 7th, 2020 Ambev released 2020 first quarter results for the period ending March 31st, 2020. Net revenue was down 1.6%, with volume declining by 5.6% partially offset by 4.3% growth in net revenue per hectoliter. The worst declines (by geography) came in Central America & the Caribbean at down 10.2%, and Brazil down 9.6%, while Latin America South increased 22% and Canada increased 3.3%.
Despite the weak first-quarter results, 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 3% annual earnings growth over the next five years. Ambev stock trades for a 2020 price-to-earnings multiple of 13.3, well under our estimate of fair value at 20 times earnings. While earnings growth is expected to be somewhat muted, the stock is down significantly from its recent highs.
This means we expect a rising valuation to add approximately 8.5% to total annual returns in the coming years. Ambev is a profitable company with leading brands all over the world, and we see 12.5 times earnings as far too low under normalized conditions.
The stock also has a dividend yield of 4.6%, the product of the precipitous decline in the share price. In December 2019, Ambev declared an annual dividend payout of $0.099 per share. Investors should note that because the dividend is declared in Brazilian currency, payment in U.S. dollars will fluctuate based on exchange rates.
The dividend appears to be secure, which provides a solid 4.6% yield. With shares also undervalued, and a modest growth outlook, Ambev looks poised to deliver total returns just above 16% per year over the next five years. The stock receives a buy rating for its high expected returns, albeit with elevated risk due to its international exposure.
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, there are still multiple buying opportunities when it comes to alcohol stocks. The world’s best alcohol manufacturers have strong brands, and generate strong 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. This will allow the major alcohol manufacturers, like those discussed here, to remain strongly profitable and keep paying dividends to shareholders.