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Dividend Aristocrats in Focus Part 34: Brown-Forman

Updated on February 6th, 2019 by Bob Ciura

The Dividend Aristocrats are a group of 57 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.


In order to become a Dividend Aristocrat, a company must possess a profitable business model and durable competitive advantages, along with the ability to raise dividends even during recessions. Alcoholic beverages manufacturers such as Brown-Forman (BF-B) have all the necessary qualities of a Dividend Aristocrat.

Brown-Forman has paid a dividend for 73 years, and it has increased its dividend for 35 years in a row. It has maintained its dividend growth streak thanks to a very strong brand portfolio. The company’s dividend is also very safe, which is a topic we explore in the following video:

Brown-Forman is one of a group of companies commonly referred to as ‘sin’ stocks. These are companies in the alcohol, tobacco, and gaming industries.

This article will discuss Brown-Forman’s business model and growth prospects, and why investors might want to wait for a better price before buying the stock.

Business Overview

Jack Daniel’s Tennessee Whiskey got its start all the way back in 1865, when Jack Daniel purchased Cave Spring Hollow. The following year, he registered the Jack Daniel Distillery, which stands today as America’s oldest registered distillery.

Brown-Forman has a large product portfolio, which is focused on whiskey, vodka, and tequila. Its most famous brand is its flagship Jack Daniel’s whiskey. Other popular brands include Herradura and el Jimador tequila, and Finlandia vodka.

Brown-Forman has focused its strategies on 10 core brands:

BFB Brands

Source: Investor Day Presentation

In early December (12/5/18) Brown-Forman reported its financial results for the fiscal 2019 second quarter. The company reported revenue of $910 million for the second quarter, down 0.4% compared to the prior year’s quarter. The revenue decline was surprising, but explained by tariffs announced last year, that pulled demand forward to the previous quarter.

In turn, demand was lower during the fiscal second quarter, as inventory levels were still relatively high at the beginning of the quarter. Fortunately, Brown-Forman expects that this impact is only temporary and that revenue will grow during coming quarters.

Brown-Forman’s earnings-per-share increased 4% in the 2019 second quarter, and rose 8% through the first half of fiscal 2019. For the full year, the company expects sales growth of 6%-7%. Brown-Forman also recently announced a 5.1% dividend increase, its 35th consecutive year of dividend growth.

Next year and beyond, Brown-Forman will continue to benefit from its leading brand portfolio, with growth in new products and geographic markets.

Growth Prospects

Brown-Forman has continued to grow in the current fiscal year, and should maintain positive earnings growth over the long-term.

One of the most compelling growth catalysts for Brown-Forman is growth is the international markets. The company operates in 170 countries around the world. International sales now represent 53% of Brown-Forman’s annual sales.

International growth is a major component of Brown-Forman’s strategy, and particularly the emerging markets. Underlying net sales increased 10% in the emerging markets over the first half of fiscal 2019, compared with just 3% growth in the United States in the same period.

Brown-Forman is ideally positioned to capitalize on the growing demand for whiskey in the emerging markets.

BFB Emerging

Source: Investor Day Presentation

There is a great deal of growth potential for Brown-Forman in emerging markets such as China, India, and Mexico, all of which posted double-digit sales growth for the company over the first half of fiscal 2019. These countries are extremely attractive for Brown-Forman, as they hold large populations and high rates of economic growth.

Going forward, there is plenty of growth potential left, as the company further expands its product line, both inside and outside of its flagship Jack Daniels brand.

In the U.S., growth will be fueled by smaller premium brands such as Woodford Reserve, which reported double-digit sales growth in the fiscal 2019 first half. Woodford Reserve was the largest contributor to Brown-Forman’s growth in the U.S. over the first half of the current fiscal year.

Separately, Brown-Forman is generating strong growth in tequila. Its Herradura and el Jimador brands each posted 10%+ sales growth over the first two quarters of fiscal 2019.

Competitive Advantages & Recession Performance

Brown-Forman has many competitive advantages. Its popular brands yield significant pricing power. And, it has a highly profitable business, with low manufacturing and distribution costs because of its global scale.

These qualities help Brown-Forman generate consistently high returns on invested capital. Return on capital exceeded 15% each year since 2008.

Brown-Forman is very resistant to recessions. This is typical among ‘sin’ stocks, as their products tend to be consumed in greater volume when economic times are tough. One could argue that alcohol manufacturers actually perform better during recessions.

Brown-Forman’s earnings-per-share through the Great Recession are shown below:

As you can see, the company grew its earnings-per-share every year through the Great Recession. This is a rare accomplishment that demonstrates the company’s defensive business model. Put simply, spirits manufacturers such as Brown-Forman are among the most recession-resistant businesses.

Valuation & Expected Returns

We expect Brown-Forman to report earnings-per-share of $1.80 in fiscal 2019. Based on this, Brown-Forman stock trades for a price-to-earnings ratio of 26.4. Brown-Forman’s valuation has come down since our report this time last year, when the stock traded with a price-to-earnings ratio above 30.

Still, Brown-Forman is valued significantly above the S&P 500 Index, and is also trading above our fair value estimate of 19.5. A complete review of Brown-Forman’s historical price-to-earnings ratios can be found in the table below:

BFB Valuation

We maintain this fair value estimate based on a more challenged operating environment, due to cost inflation and potential margin compression.

Therefore, Brown-Forman appears to be an overvalued stock. If Brown-Forman’s valuation multiple reverts toward its 10-year average, it would negatively impact future returns to the tune of 5.9% per year.

Future returns will be aided by the company’s earnings growth and dividends. We expect approximately 9% annual earnings growth for Brown-Forman through 2024, based on revenue growth, share repurchases, and benefits of tax reform. In addition, the stock has a current dividend yield of 1.4%.

Based on this, total returns are expected to reach 4%-5% per year. This is a fairly mediocre rate of return, and is due to the present over-valuation of the stock. This makes Brown-Forman a hold on the basis of its strong business model and dividend growth, but the stock does not warrant a buy recommendation.

Investors should note that Brown-Forman pays a special dividend on occasion. For example, Brown-Forman paid a special dividend of $1.00 per share in 2018. Future special dividends could make Brown-Forman’s total returns more acceptable; however, as the name suggests special dividends are not a guarantee.

Previous special dividends from Brown-Forman were paid in 2012 and 2010, so it is not something the company does every year.

Final Thoughts

Brown-Forman has a dominant position in its core product categories. Its flagship Jack Daniel’s brand should continue to lead the whiskey industry, with high growth from its smaller whiskey brands and tequila.

The emerging markets are also an appealing growth catalyst for Brown-Forman.

However, Brown-Forman is a good example of a great business trading at an unattractive valuation. It would make a great purchase at a lower price. Until then, investors should wait for a better entry point before buying shares of this Dividend Aristocrat.

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