Updated on September 23rd, 2020 by Bob Ciura
Beer stocks, just like the beverages, come in several different forms. Companies that are engaged in the beer industry offer direct exposure through manufacturing and distribution of beer, while other companies in adjacent industries offer indirect exposure through equity stakes in beer companies.
The beer industry is attractive for long-term income investors. Beer companies enjoy tremendous recession-resistance and consistent profits, which are used in large part to pay dividends to shareholders.
With this in mind, we created a downloadable spreadsheet that focuses on beer stocks. You can download our full Excel spreadsheet of beer stocks (with important financial metrics like dividend yields and payout ratios) by clicking the link below:
This article will discuss the top six beer stocks, each of which offer investors strong competitive advantages and decent long-term growth prospects. As a result, they may fit well in the diversified long-term dividend growth portfolios that we aspire to help investors build here at Sure Dividend.
The following stocks were selected according to the Sure Analysis Research Database. The six beer stocks are ranked according to their 5-year expected annual returns, in ascending order from lowest to highest.
Table Of Contents
You can use the following links to instantly jump to any specific stock:
- Constellation Brands (STZ)
- Ambev SA (ABEV)
- Diageo (DEO)
- Anheuser-Busch InBev (BUD)
- Molson Coors (TAP)
- Altria Group (MO)
Beer Stock #6: Constellation Brands (STZ)
- 5-year expected annual returns: 3.0%
Constellation Brands was founded in 1945 and has grown into a global alcoholic beverage giant, producing and distributing over 100 brands of beer, wine, and spirits, including Corona, Modelo Especial, Modelo Negra, Pacifico, Ballast Point, Funky Buddha Brewery, Robert Mondavi, Clos du Bois, Kim Crawford, Mark West, Black Box, SVEDKA Vodka, Casa Noble Tequila and High West Whiskey. The company also has a stake in cannabis company Canopy Growth (CGC).
On July 1st, Constellation Brands reported Q1 fiscal-year 2021 results (Constellation Brands’ fiscal year ends the last day of February.) For the quarter, the company recorded $1.963 billion in net sales, representing a -6% decline compared to Q1 2020,as beer and wine saw -6% and -7% respective declines.
Operating income equaled $610 million, a -2% decline. Earnings-per-share totaled -$0.94, however this included substantial losses from unconsolidated investments. On an adjusted basis earnings-per-share equaled $2.30, a 4% improvement, or $2.44 excluding Canopy Growth.
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.
Furthermore, Constellation Brands’ positioning as the second-largest beer producer in the U.S. with the accompanying economies of scale and its large portfolio of brands with deep relationships with distributors, retailers, and other channels and strong consumer loyalty give it durable competitive advantages.
These competitive advantages have driven steady margin expansion over time and very robust returns on invested capital which have averaged over 21% over the past five years.
Despite its clear strengths, Constellation Brands does have some risks. These include its heavy dependence on Mexican Beer (which supplies over two-thirds of its operating profits), ongoing and intensifying competition from sizable rivals, and its large stake in Canopy Growth.
Constellation Brands stock trades for a P/E ratio of 21.6, above our fair value P/E of 18. A declining valuation multiple could reduce annual returns by 3.6% per year through 2025. Overall, we anticipate Constellation Brands delivering 3% total returns over the next five years from valuation headwinds, plus 5% annual earnings-per-share growth and the 1.6% dividend yield.
Beer Stock #5: Ambev SA (ABEV)
- 5-year expected annual returns: 4.0%
Ambev SA is the largest brewer in Latin America, with a presence in 16 countries. It is engaged in producing and distributing alcoholic and non-alcoholic beverages.
Its main business is beer, with brands including Skol, Brahma, Antarctica, Quilmes, Labatt, Presidente, and also has a licensing agreement to produce, bottle, sell and distribute Budweiser, Stella Artois, and Corona in South America.
In the 2020 second quarter, net revenue declined 10.4% compared with the same quarter last year, as volumes fell by 9.4%. All major operating regions posted revenue declines, led by Central America & the Caribbean which was down by 34%.
Fortunately, Ambev noted a recovery toward the end of the quarter, with a 5% volume increase in June.
Source: Investor Presentation
Despite the weak first-half 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 23, above our estimate of fair value at 20 times earnings. This shows that the stock appears to be somewhat overvalued.
The stock also has a trailing dividend yield of 3.8%, the product of the precipitous decline in the share price. 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. Ambev looks poised to deliver total returns of 4% per year over the next five years. With relatively weak expected total returns ahead investors may want to look elsewhere.
Beer Stock #4: Diageo (DEO)
- 5-year expected annual returns: 7.5%
Diageo is one of the oldest and largest alcoholic beverages companies. It dates all the way back to the 17th century and today owns 20 of the world’s top 100 spirits brands. Diageo manufacturers popular spirits and beer brands, such as Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, Guinness, Crown Royal, Ketel One, and many more.
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.
Similar to its peers, Diageo’s strong growth is driven by its brand power and lower cost competitive advantages. With 3 of the top 10, 13 of the top 50, and 20 of the world’s top 100 global premium distilled spirits brands, the company enjoys strong consumer loyalty and new consumer preference. This enables them to charge higher prices and increase their margins and returns on invested capital.
Furthermore, the company’s large global volume gives them strong pricing power with suppliers and better economies of scale in production and distribution, cutting costs and further improving margins and economies of scale.
In addition to the typical geopolitical, economic, and foreign exchange risks shared by all global alcoholic beverage producers, Brexit poses a unique risk to Diageo. Given that it is headquartered and produces much of its product in Scotland, potential increases in tariffs with the E.U. could hurt the firm’s competitiveness and/or profitability in one of its major markets.
Diageo pays a semi-annual dividend, and increases the dividend regularly. The annual dividend for fiscal 2020 came to 0.6988 per share in terms of pounds, representing a 2% increase from the prior year. In U.S. dollars, the annual dividend of US$3.57 (1 ADR equals 4 ordinary shares) results in a dividend yield of 2.8%.
Diageo shares currently trade for a price-to-earnings ratio of 21.6, slightly above our estimate of fair value at 18.3. This implies negative returns of 3.3% from a declining P/E ratio.
Overall, we expect the company to generate 7.5% annualized total returns over the next half decade as 8% earnings-per-share growth, a 2.8% dividend yield and -3.3% annual returns from a declining P/E multiple. Diageo earns a hold recommendation from Sure Dividend, but we believe the other names on this list offer even higher total return potential.
Beer Stock #3: Anheuser-Busch InBev SA/NV (BUD)
- 5-year expected annual returns: 8.3%
Anheuser-Busch InBev SA/NV is the largest brewer in the world thanks to the 2008 merger of InBev and Anheuser-Busch and the 2016 acquisition of SABMiller. The company produces, markets and sells over 500 different beer brands around the world and owns five of the top ten beer brands and 18 brands with over $1B in sales. These include Budweiser, Stella Artois and Corona.
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 reported Q2 earnings on 7/30/20 and results reflected the intense damage done by the coronavirus crisis. Revenue declined 17.7% in the second quarter, and 12% in the first half of the year.
Source: Investor Presentation
EBITDA fell by 34% in the quarter. Volumes declined by 17.1% for the quarter, although volumes grew by 0.7% in June which gives investors hope that a recovery is underway.
The company recently 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. The stock currently yields 2%.
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 15.3 times our 2020 earnings estimates, which is below our estimate of fair value at 18 times earnings. We therefore think positive returns will be boosted by 3.3% annually due to a rising valuation multiple
Total returns are expected at 8.3% per year over the next five years.
Beer Stock #2: Molson Coors Brewing Company (TAP)
- 5-year expected annual returns: 11.5%
Molson Coors Brewing Company was founded all the way back in 1873 and has since 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, as well as the Miller brands including Miller Lite.
In addition to its sizable U.S. presence, the company has diversified internationally into Canada, Europe, Latin America, Asia, and Africa.
In the 2020 second quarter, the company generated $2.50 billion in sales, down -15.1% compared to Q2 2019, due to the COVID-19 pandemic. Net sales were down -8.3% in North America and -44.6% in Europe. During the quarter Molson Coors recorded net income of $195.0 million or $0.90 per share compared to $329.4 million or $1.52 per share in Q2 2019.
On an adjusted basis, EPS of $1.55 per share increased 2% year-over-year. Previously Molson Coors provided 2020 guidance, expecting sales to be flat to a low single-digit increase and free cash flow of $1.1 billion. However, the company withdrew this guidance amid the uncertainty surrounding the pandemic, and also suspended the dividend.
As the second-largest brewer by volume in the United States, Molson Coors enjoys long-standing, entrenched relationships with distributors, retailers, restaurants, bars, and pubs as well as strong consumer loyalty.
As a result, the long-term outlook for the company remains solid, especially as their balance sheet continues to improve. Furthermore, the company’s international markets will likely continue to be a source of growth, offsetting any lingering sluggishness in the U.S. beer market.
The primary risk facing the company is its heavy dependence on the U.S. beer market, which recently has been lackluster and weighing down its overall results significantly. Furthermore, as the business grows internationally, they will face increasing foreign exchange and geopolitical risks.
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 10.2, based on 2020 earnings-per-share estimates of $3.30 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 6.5% per year just from expansion of its valuation multiple. Combined with 5% expected EPS growth, we expect total returns of 11.5% per year over the next five years.
Beer Stock #1: Altria Group (MO)
- 5-year expected annual returns: 16.3%
Altria Group was founded by Philip Morris in 1847 and today has grown into a consumer staples giant. While it is primarily known for its tobacco products, it is significantly involved in the beer business due to its 10% stake in global beer giant Anheuser-Busch InBev.
On July 28th, Altria reported financial results for the 2020 second quarter. Revenue of $5.06 billion fell 2.5% year-over-year. Smokeable product volume declined 8.7% year-over-year, a full percentage point better than expectations. Smokeless product volume dropped 1%, far better than the 2.7% drop that was anticipated. Adjusted earnings-per-share came to $1.09, up 1% year-over-year. Altria also announced a 2.4% dividend increase.
The company has taken precautions to shore up its financial positions, including drawing $3 billion on its revolving credit facility, suspended its share repurchases, and it withdrew its full-year guidance due to coronavirus uncertainty. That said, the company maintained its target dividend payout ratio of 80%, in terms of adjusted EPS. If the first quarter is any indication, Altria may get through the coronavirus relatively well.
The long-term future is cloudy for cigarette manufacturers such as Altria, which is why the company has invested heavily in adjacent categories to fuel its future growth.
Source: Investor Presentation
The company purchased a 55% equity stake in Canadian marijuana producer Cronos Group, invested nearly $13 billion for a 35% equity stake in e-vapor manufacturer Juul Labs, and recently acquired an 80% ownership stake in Switzerland-based Burger Söhne Group, for its on! oral nicotine pouch brand. These investments could provide Altria much-needed growth as the cigarette market steadily declines.
However, despite these risks we continue to view Altria favorably, due in large part to its excellent dividend history and high yield. Altria recently raised its dividend for the 51st consecutive year, which placed it on the list of Dividend Kings. The Dividend Kings are an elite group of securities with 50+ years of rising dividends.
You can see the full downloadable spreadsheet of all 30 Dividend Kings (along with relevant financial metrics that matter) by clicking on the link below:
It is not only one of the most attractive picks in the tobacco space, but it is one of the most attractive stocks in the beer sector thanks to its investment in BUD.
Based on expected EPS of $4.31 for 2020, Altria stock trades for a P/E ratio of 8.9, below our fair value estimate of 11. This could boost annual returns by 4.3% per year through 2025. We also expect Altria to grow adjusted EPS by approximately 3% per year over the next five years. In addition to the 9.0% dividend yield as well as a positive boost from an expanding P/E multiple, total returns are expected at 16.3% per year over the next five years.
The beer industry has numerous players with global diversification and strong competitive advantages. Each offers investors a unique angle on the market. Some focus heavily on individual geographies, such as Molson Coors in the U.S. market and Ambev in Latin America, while Altria offers indirect exposure to the beer industry through its stake in AB InBev.
Companies that operate in beer widely enjoy strong profit margins, and the ability to withstand even the deepest recessions. Beer should continue to see steady demand each year, and the largest beer stocks enjoy high profit margins thanks to their ability to raise prices over time.
These six beer stocks have positive growth prospects and return cash to shareholders through hefty dividends. Risk-averse income investors looking for steady dividend payouts should take a closer look at beer stocks, particularly in uncertain economic times.