Updated on March 25th, 2020 by Nate Parsh
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:
- Diageo (DEO)
- Constellation Brands (STZ)
- Ambev SA (ABEV)
- Molson Coors (TAP)
- Altria Group (MO)
- Anheuser-Busch InBev (BUD)
Beer Stock #6: Diageo (DEO)
- 5-year expected annual returns: 12.8%
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.
Source: Interim Results Presentation, slide 5
In the first half of fiscal year 2020, the company saw continued growth as net sales grew by 4.2% to $9.1 billion. Excluding currency fluctuations, organic revenue improved by 4.2% with a 0.2% increase in volumes. Beer revenues grew by 2.5% organically due to price increases. Spirits grew 6.1% in the U.S.
Overall, the majority of Diageo’s brands reported an increase in sales during the quarter, led by Tanqueray (up 13%), Crown Royal (up 11%), Baileys (up 8%), Captain Morgan (up 5%) and Smirnoff (up 1%). Johnnie Walker sales were down 4% due to trade headwinds and was the lone brand to show a decline. The company also saw organic growth across all of its globally diversified geographies: including 21% organic growth in Great China.
Even more impressive was the fact that the company’s profitability improved substantially even as sales were also growing, with operating margin rising by 13 bps to 35.5%. Management used this improved profitability to increase shareholder returns by repurchasing $1.4 billion worth of stock during the first half of the fiscal year.
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 not only leads to steady sales and strong access to sellers (i.e., bars, pubs, restaurants, and retailers), it also 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.
Overall, we expect the company to generate 12.8% annualized total returns over the next half decade as 8% earnings-per-share growth, a 2.8% dividend yield and 2% annualized benefit from an expanding multiple. Diageo earns a buy recommendation from Sure Dividend, but we believe the other names on this list offer even higher total return potential.
Beer Stock #5: Constellation Brands (STZ)
- 5-year expected annual returns: 16.2%
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).
Third quarter fiscal year 2020 results for the period ending November 30th, 2019 included $2 billion in total sales (1.4% year-over-year growth), and 8.3% year-over-year growth in beer sales. However, earnings-per-share declined 10% year-over-year to $1.85, primarily due to an equity loss in Canopy Growth. The company offered updated guidance for FY 2020 that raised the midpoint earnings-per-share number by $0.40, to $9.50. The beer business (66% of total sales) is expected to grow at a clip of 7% to 8% while wine and spirits are both expected to decline 8% to 10% due to dispositions.
Constellation Brands has enjoyed strong growth over the past decade, and it expects to continue leveraging its strong brands portfolio (including six of the top 15 imported beer brands in the United States) to continue its impressive growth streak. A strong growth tailwind will be the demographic shift towards more Hispanics and Millennials in the United States, each of which tend to consume more of the company’s products than the rest of the population.
Source: Third Quarter Earnings Presentation, slide 6
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.
Overall, we anticipate Constellation Brands delivering 16.2% total returns over the next five years from valuation expansion of 6.7% annualized, plus 7% annual earnings-per-share growth and the 2.5% dividend yield.
Beer Stock #4: Ambev SA (ABEV)
- 5-year expected annual returns: 21.7%
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.
Ambev’s fourth quarter fiscal 2019 results were strong, with growth across the business.
Source: Ambev’s Fourth Quarter Earnings Presentation, slide 3
Net revenue increased 5.7%, net revenue per hectoliter was up by 2.2%, and volumes across the business grew by 3.4%. The company also had normalized net profit growth of 24.4%.
The one downside was that inflation and currency exchange volatility in the company’s outsized Latin American market exposure ate into EBITDA margins, resulting in a significant 370 basis point decline. EBITDA declined 2.7%. Still, the company’s business continues to achieve healthy growth and we believe that over the long term, these inflationary and foreign exchange figures will generally revert to historical norms. As a result, our positive long-term outlook for the company remains intact.
The company boasts dominant market share in several countries (68% market share in Brazil, 81% in Argentina, 96% in Bolivia, 90% in Paraguay and 95% in Uruguay) which gives it economies of scale, pricing power, and strong brand loyalty. As a result, we expect Ambev to remain a major force in the alcoholic beverages industry.
Its risks include 86% revenue exposure to South and Central America, meaning that it is heavily dependent on the health and stability of Latin American economies, currencies, and government.
Overall, we anticipate the company delivering 21.7% annualized total returns over the next five years due to 3% earnings growth, 13.3% annual tailwind from an expanding multiple and a ~5.4% dividend yield.
Beer Stock #3: Molson Coors Brewing Company (TAP)
- 5-year expected annual returns: 22.6%
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.
Source: Molson Coors’ Fourth Quarter Earnings Presentation, slide 11
Fourth quarter fiscal 2019 results showed a 2.8% in revenue year-over-year, though the company posted a 1.8% decline for the year. Growth in the quarter was due to higher volumes and improvements in net sales per hectoliter. This also boosted the bottom line, as adjusted earnings-per-share grew 21.4% to $1.02 compared to $0.84 in the prior-year period. For the year, adjusted earnings-per-share declined 10% due to asset impairment and restructuring charges and lower volumes.
On the bright side, the company is continuing its deleveraging efforts and is aiming for a dividend payout ratio target in the range of 20% to 25% of trailing annual underlying EBITDA. Molson Coors raised its dividend by a dramatic 39% last year, providing a strong bullish signal to investors of management confidence in the company’s future.
This confidence stems from the company’s brand power. As the second-largest brewer by volume in the United States with 24% market share, 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.
Overall, we view Molson Coors as a highly attractive opportunity, which combines a 11% annualized boost from P/E multiple expansion, 5% annualized earnings-per-share growth, and a ~6.6% dividend yield, resulting in an attractive annualized total return projection of 22.6%.
Beer Stock #2: Altria Group (MO)
- 5-year expected annual returns: 23.1%
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.
Source: Investor Presentation, slide 35
Altria’s fourth quarter earnings showed that its smokeable products shipment volume declined 8.7% compared to the domestic cigarette industry’s volume decline of 4.5%. The smokeless products shipments declined by 4.0%.
However, the company’s investments in growing businesses such as vaping and Anheuser-Busch InBev should help offset this headwind.
The company bought back $845 million worth of shares in 2019 and has $500 remaining on its current $1 billion share repurchase authorization. Management had been in talks with Philip Morris International to engage in an all-stock merger that could result in numerous synergies, but the tie up never advanced beyond the discussion stage.
Altria has several other reasons to be bullish about its future. These include aggressive investments in new growth products, strong brand power and customer loyalty, high barriers to entry and a highly recession resistance business.
That being said, several risks remain here. First and foremost, there is no escaping the fact that cigarette volumes seem bound for continued declines. Additionally, management is paying heavily for efforts to generate future growth, such as the high multiple for equity in JUUL (which faces its own public image, legal, and regulatory challenges right now). Altria recorded a non-cash pre-tax impairment charge of $4.1 billion related to its investment in JUUL during the 2019 fourth quarter.
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 50th 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. We expect 23.1% annualized total returns stemming from 8.4% annualized multiple expansion, forecasted 4% annual earnings-per-share growth, and a ~10.7% dividend yield.
Beer Stock #1: Anheuser-Busch InBev SA/NV (BUD)
- 5-year expected annual returns: 24.1%
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.
The company is also well diversified geographically, with about 70% market share in Brazil and 50% market share in the U.S. In 2019, revenue was globally sourced in the following percentages: 30% North America, 42% Latin America, 15% Europe, Middle East and Africa, and 13% Asia Pacific.
Source: Fourth Quarter Earnings Presentation, slide 6
Fourth quarter fiscal 2019 earnings were strong. AB InBev achieved solid growth as total revenue increased 2.5% for the quarter and 4.3% for the year. Revenue per hl was up 3.1% during the year, but just 0.9% for the quarter. Global brands grew by 2.1% for the quarter, but produced 5.2% growth for the year.
Outside of its home markets, global brands grew 8% during the fiscal year. Total volumes grew 1.6% and 1.1%, respectively, for the fourth quarter and full year, which helped grow EBITDA 2.7% for the year. For the quarter EBITDA declined by 5.5%. COVID-19, better known as the coronavirus, caused a significant decline in demand in China during the fourth quarter, costing the company ~$285 million USD of revenue and $170 million USD of EBITDA. Still, EBITDA margins improved 65 basis points to 40.3% for the fiscal year.
These results reflect the staying power of the company’s two main competitive advantages: a material cost advantage over its peers and its brand power. AB InBev’s production, distribution, and procurement scale are much larger than its competitors, enabling it to exert pricing power and achieve economies of scale.
Its brand power is significant, given that it owns five of the world’s largest beer brands, three of which are considered premium. This results in strong customer loyalty while also attracting many new beer consumers. Furthermore, the premium brands enjoy higher margins than non-premium brands, making them more profitable for the company and driving its superior returns on invested capital.
The main risk for AB InBev is its significant international exposure, meaning that fluctuating foreign exchange rates materially impact its results. The company is also highly exposed to Latin America (53% of EBIT in fiscal year 2019), making it heavily dependent on one of the more economically and geopolitically volatile regions of the world.
Overall, we expect the company to deliver 24.1% annualized returns over the next half decade due to a 4.8% dividend yield, annual earnings-per-share growth of 3% expected and a 16.3% annual tailwind from an expanding valuation multiple. AB InBev is our top pick in the beer sector in terms of five-year expected returns.
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 high yields and steady dividend payouts should take a closer look at beer stocks, particularly in uncertain economic times.