The dividend payout ratio has largely remained in a range between 32% and 39% over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The company has a really high return on equity, which is common for most high quality dividend payers that do not require a lot of equity to operate the business. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, Brown-Forman stock is overvalued, as it trades at a P/E of 27.20 and yields only 1.60%. I am analyzing the company because I believe it is a quality dividend growth company, which will be a very good addition to my portfolio on dips below $60. I will still keep holding onto my existing shares, which I believe have a value of approximately 30 times earnings to a private owner. As earnings will increase over time, that value should increase as well. To put it in Warren Buffett terms, this is an excellent business, but unfortunately the price is too rich to justify an investment at present terms.
There has recently been M&A activity in the industry, as Beam is in the process of being acquired by Japanese company Suntory at 30 – 32 times earnings. It is possible that Brown-Forman shares could have been bid up because they could be a potential acquisition target by a larger competitor.
However the dual-class shareholder structure, and the fact that voting power is concentrated in the Brown family, makes a successful acquisition of Brown-Forman by someone like Diageo highly unlikely. This could be a plus however, as acquisitions of quality dividend companies rob shareholders of the acquisition target from the dividend growth potential they could have enjoyed, had the company not been bought out. If earnings per share double every decade, and dividend payout ratios are maintained, long-term investors will do just fine.
I currently find Diageo to be a much better value, at 18.70 times earnings and yield of 2.40%. Therefore, I recently purchased Diageo shares.
Full Disclosure: Long BF.B, DEO