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AB InBev - dividend halved

Nicholas Hyett, Equity Analyst | 14 April 2020 | A A A
AB InBev - dividend halved

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Anheuser-Busch Inbev Com Stock NPV

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AB InBev has decided to reduce the proposed final dividend for 2019 from €1.00 per share to €0.50 per share, reflecting the ongoing uncertainty caused by COVID-19.

The shares rose 2.9% following the announcement.

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Our View

The closing of pubs and restaurants around the world has cut off a major source of sales for brewers like AB InBev. This would be a problem at any time but it's especially worrying given the outstanding debt pile, courtesy of the group's 2016 acquisition of SABMiller.

Efforts to bring debt under control have recently seen a minority stake in Budweiser APAC, part of the group's Asian operation, sold for $5.8bn. That follows the $11bn sale of the Australian business earlier this year. Management has now reduced net debt to 4x operating cash profits, but know they really need to be half that.

In our opinion, the COVID-19 pandemic is going to make that a nigh impossible task in the short run. Frankly, we'll be impressed if the group can just stop the debt load growing any further, excluding the impact of asset sales. Once conditions return to normal AB InBev should be able to keep paying the debt down, but this looks like it might come at the cost of shareholder returns. The dividend has already been halved, and we suspect this may not be a temporary adjustment.

Still, if you can see past the debt shaped millstone hanging around the group's neck, there are bright spots.

Footholds in less-developed markets from Latin America to Sub-Saharan Africa mean there's scope for huge volume growth in the years ahead. That's despite AB Inbev already brewing one in four pints globally, and a growing middle class in those economies opens the door to price rises too.

In developed markets a trend towards more premium products presents the opportunity to boost both margins and revenues. That's played into the group's hands as strong brands like Michelob Ultra, Stella and Corona have reaped the rewards of the shift. However, recent currency and commodity headwinds have increased costs and hurt margins.

AB Inbev has an enviable portfolio of brands, and if it can control its debt it should be fine in the long term. Over time we think the group should be able to rebuild the dividend, but given the debt position we'd be surprised by a quick bounce back.

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Full year results (27/02/20)

AB InBev reported organic revenue growth of 4.3% for the full year, reaching $52.3bn. Volumes grew 1.1%, and revenue per hectolitre increased 3.1%. However, cash profits rose just 2.7% to $21.1bn as higher costs and a challenging economic environment held the group back.

Management estimates that coronavirus and tough prior year comparisons will reduce first quarter cash profits by around 10% in 2020, although they still expect 2-5% growth over the course of the full year.

Organic volumes declined in North America and Asia Pacific regions by 2.4% and 2.9% respectively. All other regions recorded volume growth, and every region grew revenue. However, sales growth slowed in the fourth quarter, primarily due to lower revenue per hectolitre as part of the group's push for affordability in some markets.

Cash profits fell in South America, EMEA (Europe, Middle East & Africa) and in the Global Export and Holding Companies division, but rose in North America, Asia Pacific and Middle America.

AB InBev's global brands, Budweiser, Stella Artois and Corona, grew sales by 5.2% overall, and 8.0% outside their home markets.

Net capital spending rose from $4.6bn to $4.9bn. This was primarily spent on improving production facilities and logistics and commercial investments.

Net debt declined from $104.2bn to $95.5bn, although when the expected proceeds from the sale of the group's Australian operations are included net debt would be $84.6bn. On this basis net debt equates to 4.0x cash profits, which the group intends to reduce to around 2x.

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