A dividend cut is one of the worst outcomes for income investors. When a company cuts its dividend, it usually has a two-pronged negative effect on shareholders. Not only does the dividend reduction result in lower income for the shareholder, but it also is typically accompanied by a significant decline in the stock price.
However, what happens to a stock after a dividend cut is not a foregone conclusion. Sometimes, a dividend cut is a precursor to a prolonged period of underperformance, but other times, a dividend cut is a necessary part of a long-term turnaround. Companies might reduce their dividend for a variety of reasons.
Global beer giant Anheuser-Busch InBev (BUD) recently cut its dividend by 50%. The stock has performed poorly in 2018, down over 30% year-to-date. But AB-InBev still has a huge portfolio of strong brands and durable competitive advantages. In this case, the dividend cut is likely to place the company on stronger financial ground, and pave the way for a return to growth going forward.
Overview And Recent Events
AB-InBev is the largest beer company in the world with a heritage going back over 600 years. AB-InBev, in its current form, was created with the 2008 merger between InBev and Anheuser-Busch. In 2009, the company launched its U.S.-listed shares. Today, AB-InBev generates more than $56 billion in annual revenue, and sells over 500 beer brands in 150+ countries around the world.
AB-InBev has a massive product portfolio, with leading brands across multiple beverage categories. Its three core brands are Budweiser, Corona and Stella Artois; it also has a multi-country portfolio of brands including Beck's, Castle, Castle Lite, Hoegaarden, and Leffe. In addition, AB-InBev has built a large portfolio of local beers, such as Aguila, Antarctica, Bud Light, Brahma, Cass, Chernigivske, Cristal, Harbin, Jupiler, Klinskoye, Michelob Ultra, Modelo Especial, Quilmes, Victoria, and many more.
The company’s huge portfolio and global scale provide it with significant competitive advantages, namely a lower cost structure and the ability to generate growth in new markets. In the 2018 third quarter, AB-InBev grew total revenue by 4.5% due to higher pricing and increased sales volumes. Its Global Brands portfolio led the way, with 7.7% revenue growth. EBITDA margin expanded 116 basis points, reflecting efficiency gains, while adjusted earnings-per-share fell fractionally due to higher raw materials costs.
Not All Dividend Cuts Are Created Equal
Along with third-quarter financials, AB-InBev approved an interim dividend of 0.80 EUR per share for the fiscal year 2018. In addition, the company proposed a final dividend of 1.00 EUR per share for the fiscal year, to be paid in May 2019. This would result in a total dividend payment for the fiscal year 2018 of 1.80 EUR per share, a 50% reduction from the previous year. In terms of U.S. dollars, AB-InBev has proposed fiscal 2018 dividends of approximately $2.03 per share, which results in a forward dividend yield of 2.7%.
AB-InBev is headquartered in Belgium, which means U.S. investors face a dividend withholding tax of 30%. As a result, AB-InBev stock has an after-tax dividend yield of approximately 1.9%. AB-InBev’s significant dividend cut is likely to deter income investors, who are accustomed to higher yields. But there are reasons not to avoid AB-InBev stock altogether.
AB-InBev’s dividend yield is still on par with the S&P 500 Index, as well as its industry peers. For example, Molson Coors (TAP) stock has a 2.5% dividend yield, and European beer giant Heineken N.V. (HEINY) stock has an after-tax dividend yield of 1.6%. Meanwhile, smaller U.S. beer stock Boston Beer Company (SAM) does not pay a dividend at all. Therefore, AB-InBev still provides a competitive dividend yield when stacked up against many of its competitors.
And, while some companies cut their dividends as a last-gasp effort to avoid financial ruin, AB-InBev’s dividend cut has a specific purpose. As a result of significant mergers and acquisitions that built AB-InBev into a global beer powerhouse, including Corona and SABMiller, the company’s debt load increased dramatically. The dividend cut will allow AB-InBev to accelerate its deleveraging process, so that it can return to its target net-debt-to-EBITDA ratio of 2.0x, while also providing the company the ability to invest in growth initiatives.
Final Thoughts
AB-InBev’s decision to cut its dividend by 50% was a difficult but necessary one. The company’s huge acquisitions cemented its position atop the global beer industry, but it also left it with too much debt. In an environment of rising interest rates, it is even more important for AB-InBev to reduce its debt to a more manageable level. Going forward, AB-InBev’s strong product portfolio and exposure to high-growth markets will allow the company to return to dividend growth down the road.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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