In a world where scores of beverage products are in perpetual life-or-death competition, it should reassure investors in Ambev SA (ADR) (NYSE:ABEV) that its business is doing so well that it has room to double its dividend. In fact, it could even double it this year, and triple it two years later (from present levels).
For those who don’t recognize Ambev stock or its products, ABEV is the owner of all of the following beers: Skol, Brahma, Quilmes Cristal, Stella Artois, Paceña, Taquiña, Huari, Antarctica Becker, Beck, Leffe, Corona, Báltica, Pilsen, Patricia, Presidente, Brahma Light, President Light, Bohemia, The One, Becker, Bud Light, Ouro Fino, Modelo Especial, Brahva, Brahva Gold, Extra, Hoegaarden, and Budweiser brands.
ABEV also sells soft drinks, bottled water, isotonic beverages, energy drinks, dairy products, coconut water, powdered juices, cereal bars, and ready-to-drink teas under the the following brands: Guaraná Antarctica, Canada Dry, Squirt, Pepsi, Guaraná Antarctica Black, Gatorade, H2OH!, Lipton Iced Tea, Fusion, Monster, Red Rock, Pepsi-Cola, 7 Up, Kokanee, Banks, Deputy, and Do Bem brands.
The issue with consumables like beverages is that, unless it is a new company that has exploded into the market, there is very little organic earnings growth happening. Beverage manufacturing is a pretty mature business.
However, that can be a good thing because mature businesses mean that, while earnings growth may be slow, cash flow can be exceptional. With lots of cash flow comes increased dividends.
Ambev stock has had an erratic dividend history. However, ABEV remains a phenomenally profitable operation. The last three fiscal years delivered net income between $3.6-$4.2 billion for Ambev. Free cash flow has ranged from $2.7-$3.8 billion.
It is the free cash flow that interests me as an investor. Capital expenditures have been relatively consistent, but the cash flow is so robust that I believe Ambev has room to increase its dividend. At $0.0719 per share, with a 15.7 billion share float, that amounts to $1.13 billion, and a 1.1% dividend.
Yet free cash flow is nearly $0.18 per share. Boosting the dividend to $0.14 per share would mean an additional outlay of $1.13 billion. That’s easily affordable — not the least of which is because Ambev sits on over $2.4 billion in cash and only less than a billion dollars in debt.
Indeed, if free cash flow stays solid, another $0.07 increase would even be possible. It’s a lot easier to attract dividend investors when a yield pushes through the 3% mark.
Now, there is some difficulty in evaluating future growth for Ambev stock. ABEV is based in Brazil and is dependent, to a large extent, on Brazil’s economic fortunes. This may foretell some good news. One of the reasons net income hasn’t been soaring is because the country has been stuck in the deepest recession in ages.
Bottom Line on Ambev Stock
The country now expects 1.1% GDP growth in 2018, and 3% in 2019. That should provide a boost to Ambev stock. With ABEV stock at 9x net income, the combination of improved economics and a dividend raise may foretell a higher Ambev stock price
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he had no positions in any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. He also is the Manager of the Liberty Portfolio. Lawrence Meyers can be reached at mailto:thelibertyportfolio@gmail.com.
