Updated on March 19th, 2021 by Bob Ciura
The Dividend Aristocrats are a group of 65 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
Within the Dividend Aristocrats, there are varying types of stocks with differing yields. Some of the Dividend Aristocrats have higher yields, but these high-yielders tend to grow their dividends at a lower rate each year.
At the same time, there are Dividend Aristocrats with low yields. While these may look unappealing on the surface, they often provide higher levels of dividend growth from year to year. An example of this is Brown-Forman (BF.B), a Dividend Aristocrat that has increased its dividend for 37 consecutive years.
There are currently 65 Dividend Aristocrats, including Brown-Forman. You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with metrics like dividend yields and price-to-earnings ratios) by clicking the link below:
Brown-Forman has paid a dividend for 76 years, and it has historically increased its dividend at a high rate. Over the past 10 years, the company has increased its dividend at a compound annual growth rate of ~9%.
Its dividend increase last year was just 3%, due to the overall economic uncertainty because of the coronavirus pandemic. But assuming the global economy continues to recover, investors can expect Brown-Forman’s dividend growth to accelerate as well. This article will discuss Brown-Forman’s business model, growth prospects, and valuation.
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.
Source: Investor Presentation
Brown-Forman reported its third quarter (fiscal 2021) earnings results on March 4. The company announced that it generated revenues of $910 million in the period, which was up 1.3% from the revenues the company generated during the previous year’s quarter. Brown-Forman’s revenues came in ahead of the analyst consensus, beating it by $9 million.
Sales were negatively impacted by currency rate headwinds, which is why it should be noted that underlying net sales, or organic sales, were up more than 1% during the quarter, and up 2% so far during this fiscal year. Brown-Forman’s earnings-per-share totaled $0.45 during the third quarter, which was slightly above the consensus analyst estimate, beating the consensus by $0.02. The quarter’s profits were down year-over-year, declining by 5% compared to the previous year’s quarter.
The economic downturn brought on by the coronavirus pandemic weighed on Brown-Forman last year. But over the long-term, Brown-Forman should continue to benefit from its leading brand portfolio, with growth in new products and geographic markets.
Brown-Forman has a strong growth track record; the company was even able to increase its earnings-per-share during the last financial crisis, as demand for alcohol is not especially cyclical. During the 2010 to 2020 time frame, Brown-Forman grew its earnings-per-share by a 7% average compound rate. Earnings-per-share were driven by a combination of several factors, including revenue growth, rising margins, and the impact of a declining share count.
Thanks to the fact that Brown-Forman owns strong brands and is active in the super and ultra-premium alcoholic beverages markets, which see consistent market growth, Brown-Forman should be able to keep its revenue growing going forward.
This has been an important growth factor for Brown-Forman in the past. Brown-Forman’s Jack Daniels brand, as well as its American super-premium whiskeys, continue to grow around the globe.
International operations were the main growth driver for currency-adjusted sales during the last couple of quarters and will likely remain an important growth factor going forward.
Higher overall sales allow for margin increases due to better economies of scale, which makes the company more efficient overall, and positively impacts its net earnings growth rate.
In addition, Brown-Forman has aggressively repurchased shares in the past decade, which adds some additional growth to its bottom line. 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. We are forecasting 7% annual earnings-per-share growth over the next five years.
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.
Brown-Forman is also very resistant to recessions. This is typical among alcohol stocks, as their products tend to be consumed in greater volume when economic times are tough. One could argue that alcohol manufacturers actually perform well during recessions.
Brown-Forman’s earnings-per-share through the Great Recession are shown below:
- 2007 earnings-per-share of $0.76
- 2008 earnings-per-share of $0.77 (1.3% increase)
- 2009 earnings-per-share of $0.82 (6.5% increase)
- 2010 earnings-per-share of $0.95 (15.9% increase)
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
Based on our estimate for 2021 earnings-per-share ($1.75), and a current share price near $69, shares of Brown-Forman are currently trading at P/E ratio of 39.5.
This is a very high multiple, even taking into consideration the strength of Brown-Forman’s business. We estimate a fair value P/E ratio of 24.
If shares were to revert to 24 times earnings, this implies the potential for a -9.5% valuation headwind over the next five years. On this basis, the valuation appears especially stretched, even by Brown-Forman’s lofty standards.
A strong earnings growth rate (7%) and the 1% dividend yield will help, but a reduction in the security’s valuation to a more “normalized” level would effectively wipe out any intermediate-term total return potential.
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. Previous special dividends from Brown-Forman were paid in 2012 and 2010, so it is not something the company does every year.
Overall, expected returns for Brown-Forman are -1.5% per year. A negative expected rate of return makes the stock a sell.
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 and of course the dividend growth streak is enviable.
Brown-Forman is a good example of a great business trading at an exceptionally high valuation. If shares were to continue trading at 30+ times earnings, total return potential would be average. However, that is a speculation that we are not comfortable making at this juncture. As such, despite a solid dividend and very strong business, shares do not look particularly compelling for purchase right now.