Anheuser Busch Inbev SA (ADR) (BUD): 3 Pros, 3 Cons

Advertisement

We’re just two months away from the expected closure of the gigantic “Megabrew” beer merger. If completed, it will join Anheuser Busch Inbev SA (ADR) (NYSE:BUD) with SABMiller plc (ADR) (OTCMKTS:SBMRY). This will unite the world’s two largest brewers under one roof.

BUD Stock: 3 Pros and 3 Cons to Anheuser Busch

If the merger succeeds, and the promised benefits emerge as planned, BUD stock is likely to surge.

However, there’s a lot that’s still unclear about the firm’s prospects as the merger draws closer. Among the questions, monopoly concerns, growth strategy for the combined firm and a new dividend policy all are on investors’ minds.

With all this in the air, is BUD stock a good buy now, or is it better to wait until the deal closes?

BUD Stock Pros

Sin Pays: A prominent finance blog put up a post last year titled “Beer Before Steel“. In it, the author calculated the returns of 30 different large U.S. industries over the past 82 years. Beer and liquor came in second place, trailing just cigarettes. Beer beat out many other strong sectors, including food, healthcare and oil to take the second spot.

Over the last 82 years, beer stocks returned more than 7.5% in real terms annually. That’s massive. Nominal returns topped 10% per year. Compared to a median S&P 500 stock, beer shares outperformed by 2.5% per year. Put simply, unless you have ethical reasons for not investing in alcohol, beer stocks belong in almost everyone’s portfolio.

Huge Scale: Prior to the merger, Anheuser-Busch comes with 22% of the world beer market. SABMiller, at No. 2, has a 13% share. Divestments of the post-merger company will shrink this a bit, but the combined firm will acount for roughly a third of the global beer market. There’s no other firm that even hits 10%. Heineken N.V. (ADR) (OTCMKTS:HINKY) is next up, but its share is in the single digits.

This huge scale gives the combined company a tremendous market position. It can negotiate harder than anyone else for costs all across its supply chain — from grain and bottle suppliers to advertising, distribution and retailers. It’s unprecedented for one firm to control this much of a gigantic global market. If Anheuser-Busch uses the opportunity well, it can generate stunning profit margins.

Craft Beer Threat Fading: The Daily Beast recently warned readers of craft beer’s “looming crisis“. After watching years of double-digit growth, entrepreneurs assumed craft beer offered easy profits. Now, however, supply is exceeding demand. Old product is  going bad on shelves increasingly, as too many new, smaller breweries vie for consumers’ limited quantity of beer purchases.

If things play out like 1996, when craft beer last experienced a hangover, the sector should see sales flatline for the next five years. This coming bust will force many of the larger craft brewers to sell to larger competitors on the cheap or fail outright.

This will allow the larger craft brewers, such as Boston Beer Co Inc (NYSE:SAM) — maker of Sam Adams — to consolidate its market position. Anheuser Busch wants more craft brewers. It has bought Goose Island, Breckenridge and Blue Point Brewing, among others. The upcoming craft beer shakeout should be great for BUD stock. It will weaken the competition and allow the giant to fortify its position.

BUD Stock Cons

Dividend Questions: BUD stock currently pays a generous 3.7% dividend yield. Coming from a company with such stable and strong earnings, that’s a great base for steady income. However, the dividend may be cut substantially following the merger. As of yet, the combined company hasn’t revealed its dividend plans.

The combined firm will debut with more than $100 billion in debt. Even in 2016, that’s a huge sum, topping the wealth of Bill Gates. The company’s net debt-to-EBITDA ratio would be almost 4, well above old Anheuser-Busch’s target of 2.

To get back to a less levered balance sheet, the new company would have to pay off tens of billions in debt, presumably limiting the amount of cash the company wants to spend on its dividends. SABMiller currently yields only 1.8%. This suggests that its shareholders wouldn’t be too outraged if the combined company pays much less than the current 3.7% yield.

Too Big to Grow?: Simply put, we’ve never seen a brewer this big before. The company already controls a third of the global beer market, there are real questions about further upside. Even if the company finds meaningful organic growth or good merger and acquisition targets, regulators will block moves that would make the company too powerful. Anti-monopoly laws still restrict corporate empires around much of the globe.

On a related note, the law of large numbers applies here. For a company with, say, $1 billion in sales, it only takes an additional $100 million in revenues to grow at 10%. Anheuser-Busch, on the other hand, generates $42 billion in revenue. And that’s before the SABMiller merger. It’s almost impossible to generate large organic growth in a stable industry where you already dominate.

Low-Alcohol Beer: Anheuser-Busch says it aims to more than double its sales of low and non-alcohol beers by 2025. It’s aiming for 20% of its total beer sales to be in this category by 2025, up from just 9% today.

Supposedly, there is a health push away from alcohol. In some developed markets, such as the United Kingdom, beer volumes have dropped over the last decade. The company thus sees a market opportunity to sell products that taste like beer but with less or no alcohol.

This could work.

However, to me, it seems about as plausible as when fast food restaurants say they are going to sell more salads. Generally, it just serves as a distraction for the company and a waste of marketing resources.

Bottom Line on BUD Stock

I believe most investors should own alcohol stocks. Whether they shold own BUD stock in particular is a more difficult question.

In my view, it’s probably better to wait until after the merger, and see how things shake out. A dividend cut would probably hit BUD stock in the short-term as yield seekers exited. For investors wanting to play the alcohol sector, Molson Coors Brewing Company (NYSE:TAP) and Diageo plc (ADR) (NYSE:DEO) seem like safer choices at the moment.

As of this writing, Ian Bezek owned shares in Diageo and Boston Beer. You can reach him on Twitter at @irbezek.

More From InvestorPlace

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/anheuser-busch-bud-stock-3-pros-3-cons/.

©2024 InvestorPlace Media, LLC