Published on June 30th, 2018 by Bob Ciura
With summer in full swing and the 4th of July in the near future, it’s a good time to review the major alcoholic beverage stocks. These are companies that manufacture and distribute a variety of alcoholic beverages, including beer, wine, and spirits.
The top companies in this sector have many attractive qualities in common. They have strong brands, which gives them pricing power. And, thanks to their global distribution, they generate high levels of 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 alcoholic beverage stocks, in order from lowest expected returns to highest.
Alcoholic Beverage Dividend Stock #6: Ambev SA (ABEV)
- Expected Annual Returns: 4%-5%
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: 2018 Investor Presentation, page 4
On 5/19/18 Ambev reported first-quarter earnings results. Sales rose 5.9% for the quarter, due to excellent growth in southern Latin America, which grew 25%. Central America and the Caribbean reported 8.7% growth. Brazil was weak with a 1.8% sales decline, but this was more than offset by growth in other regions. Earnings before interest, taxes, and depreciation (EBITDA) increased 10% for the quarter. Earnings-per-share increased 14% from the same quarter a year ago.
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. In addition, 2018 is set to be a good year for the company, as the 2018 FIFA World Cup is a very popular event in many of the countries in which Ambev operates.
We are expecting 10% earnings growth in 2018, and 5% annual earnings growth over the next five years. In the five years Ambev has been publicly traded, the stock has held an average price-to-earnings ratio of 21.5. We believe this is a reasonable estimate of fair value for this stock. Ambev is a profitable company with leading brands, and a top position in several emerging markets, so it is reasonable to expect a price-to-earnings ratio above 20.
That said, the stock is currently overvalued based on its price-to-earnings ratio (using expected 2018 earnings) of 25.5.. Over the next five years, contraction of the price-to-earnings ratio could reduce shareholder returns by approximately 4.2% per year.
Ambev pays a current dividend of $0.16 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 4%-5% annual range.
Alcoholic Beverage Dividend Stock #5: Constellation Brands (STZ)
- Expected Annual Returns: 5%-6%
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 Extra, Corona Light, Modelo Especial, Modelo Negra, and Pacifico. It also has craft beer brands including Ballast Point and Funky Buddha Brewery. In addition, Constellation’s wine brands include Robert Mondavi, Clos du Bois, and Kim Crawford, as well as spirits brands including SVEDKA Vodka.
On 3/29/18 Constellation Brands reported fiscal 2018 financial results. Net sales increased 3.5% for the fiscal year, while adjusted earnings-per-share increased 29%. Beer sales increased 10% last year, thanks to strong performance of the company’s Mexican beer portfolio.
More recently, on 6/29/18 the company reported first-quarter results. Earnings-per-share of $2.20 missed analyst expectations by $0.23 per share. This sent shares of Constellation Brands down ~4% the day it reported earnings, but the overall results were quite strong. Sales increased 6% for the quarter, due to strong performance in beer. And, the company raised earnings guidance for the full year.
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, the high-end beer market grew by 5% per year in the last decade, while sales of all other beer types fell by 3%. Craft beer is growing at an even higher rate in the U.S.
Source: Earnings Presentation, page 15
Constellation Brands leapt on the craft beer craze early on. 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.
Constellation Brands also has a number of competitive advantages. Its long list of strong brands gives the company pricing power. It has six of the top 15 imported U.S. beer brands, and 19 of the 100 top-selling wine brands.
Constellation Brands trades for a price-to-earnings ratio of 23.2, which is above our fair value estimate of 18.0. A declining valuation could reduce total returns by 5.0% 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 1.3%.
Even though we believe the stock is overvalued, total returns are expected to reach 6.3% per year.
Alcoholic Beverage Dividend Stock #4: 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 whisky 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. Diageo has 20 of the world’s top 100 spirits brands.
On 1/26/18 Diageo released financial results for the first half of fiscal 2018. Revenue and operating profit increased 1.7% and 6.1%, respectively, for the six-month period. Organic sales growth of 4% was due to 1.8% volume growth, which more than offset unfavorable currency exchange. Earnings-per-share increased 9% for the first half of the fiscal year.
Diageo is among the more attractive companies on this list for growth investors. Sales are growing at a rapid pace, particularly in the emerging markets, where Diageo has built a significant presence. Consider that Diageo’s organic revenue rose 1% for Diageo in North America over the first half of the fiscal year, while sales increased 4% in Europe, 7% in Latin America, and 7% in Asia in the same time frame.
In particular, Mexico is a specific example of a high-growth economy that Diageo is focusing on.
Source: Investor Presentation, page 28
We estimate 7% annual earnings growth through 2023, 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 21.3, 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 2.9% 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 2018 interim dividend payment was $1.39 per ADS, representing an 18% increase from the interim dividend last year in U.S. dollars. We expect 6.5% annual returns for Diageo stock over the next five years, consisting of 7% earnings growth, a 2.4% dividend yield, and negative returns of 2.9% per year from valuation compression.
Alcoholic Beverage Dividend Stock #3: Brown-Forman (BF-B)
- Expected Annual Returns: 8.0%
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 53 high-quality stocks with 25+ consecutive years of dividend growth. You can see all 53 Dividend Aristocrats by downloading the Excel spreadsheet below:
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.
On 6/6/18 the company reported fourth-quarter earnings results for fiscal 2018. Net sales and earnings-per-share each increased 8% for the full year. Organic revenue increased 6.5% last year, while foreign exchange provided a 1% revenue boost.
Brown-Forman saw broad-based growth, across geographic markets. Underlying sales rose 5% in the U.S. and developed markets outside the U.S., while emerging markets grew 13% for the year.
Source: Earnings Presentation, page 7
Brown-Forman’s growth is fueled by premium whiskey in the U.S., as well as tequila. Last fiscal year, the company’s super-premium American whiskey brands grew underlying net sales by 15%, including 22% growth from Woodford Reserve. Meanwhile, Herradura and el Jimador grew underlying net sales 19% and 9%, respectively.
Going forward, Brown-Forman will also benefit considerably from lower taxes, as the company’s tax rate is forecasted to drop to 21% from ~30% this year.
The company’s guidance calls for 6%-7% sales growth in fiscal 2019, as well as 18%-25% earnings growth for the upcoming year.
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.
Brown-Forman stock trades for a price-to-earnings ratio of 27.3, which is above our fair value estimate of 24.6. As a result, we expect the valuation to compress over the next five years, which could reduce total returns by 2.1% per year.
The combination of earnings growth, dividends, and valuation changes is expected to result in annual returns of 8% per year.
Alcoholic Beverage Dividend Stock #2: Anheuser Busch InBev (BUD)
- Expected Annual Returns: 8%-9%
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. In 2013, AB-InBev acquired the remaining portion of Grupo Modelo that it didn’t already control, for $20 billion. Finally, AB-InBev acquired SABMiller for over $100 billion.
Going forward, AB-InBev’s most attractive growth catalyst is in the international markets, since the North American beer industry is struggling. AB-InBev’s revenue in North America declined 2.2% last quarter, due to a 4.1% drop in volumes. Fortunately, revenue in western Latin America (which includes Mexico) increased 14% last quarter. Elsewhere, revenue increased 4.2% in Europe, the Middle East, and Africa, and sales rose 5.2% in Asia-Pacific.
Source: Earnings Presentation, page 29
We expect AB-InBev to grow earnings-per-share by 6%-7% 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.
We expect Anheuser Busch InBev to generate earnings-per-share of $4.70 in 2018. The stock trades for a price-to-earnings ratio of 21.1, compared with our fair value estimate of 19. As a result, we view the stock as slightly overvalued, and a compression of the earnings multiple could reduce total returns by 2% per year.
Earnings growth and dividends can more than offset the overvaluation of the stock. Anheuser Busch InBev has a 4% dividend yield. As a result, we expect total returns of 8.5% per year through 2023.
Alcoholic Beverage Dividend Stock #1: Molson Coors (TAP)
- Expected Annual Returns: 10%+
Molson Coors Brewing Company was founded in 1873. Since then, it has grown into one of the largest U.S. brewers, with 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, page 14
On 5/2/18 Molson Coors reported first-quarter results. Net sales of $2.33 billion decreased by 4.8% from the same quarter a year ago. Lower volumes were partially offset by higher pricing. Worldwide volume declined 3%, led by the U.S. and Canada. Adjusted earnings-per-share declined 40%, but this was due to non-recurring items including a new revenue recognition standard. Still, it was a relatively disappointing quarter for Molson Coors. The company noted general softness in the U.S. beer market, where volume declines outpaced the overall rate of decline last quarter.
Molson Coors has fallen behind the trends in the U.S. beer industry, specifically the craft beer boom. The overall beer industry is struggling, as U.S. beer consumption fell 1.1% in 2017. But 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 recent 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 13.9, based on 2018 earnings-per-share estimates. We view fair value as a price-to-earnings ratio of 16.0, which means Molson Coors stock could generate returns of 2.9% per year.
In addition, we expect Molson Coors to generate annual earnings growth of 5% per year, and the stock has a 2.4% dividend yield. We expect total returns just over 10% per year, making Molson Coors the alcoholic beverages stock with the highest expected returns.