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AB InBev - dividend drains away

Sophie Lund-Yates, Equity Analyst | 29 October 2020 | A A A
AB InBev - dividend drains away

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Anheuser-Busch Inbev Com Stock NPV

Sell: 51.02 | Buy: 51.31 | Change -3.16 (-5.81%)
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AB InBev's third quarter revenue grew 4.0% to $12.8bn reflecting volume growth and stronger pricing. Cash profits (EBITDA) fell 0.8% to $4.9bn as costs increased as supply chains were reorganised.

Management has cancelled the interim dividend to focus on debt reduction. A decision on the full year dividend will be announced with the group's full year results in February.

AB InBev shares rose 1.9% in early trading.

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Our View

The closure of pubs and restaurants around the world 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 group's sizeable debt pile, courtesy of the 2016 SABMiller acquisition.

That's led the group to suspend its interim dividend. Despite selling a minority stake in Budweiser APAC, part of the group's Asian operation, for $5.8bn, and the $10.8bn sale of the Australian business, debt was at a whopping 4.86 times underlying operating profit at the half year. point, and while some of that is down to decreased profits thanks to COVID-19, it's still way too much.

So while a dividend cut isn't pleasant for shareholders (and we suspect the full year dividend will be rebased if it returns in February), we support the move. In the long run investors should own a stronger business once the balance sheet is straightened out.

So, if you can see past the debt shaped millstone hanging around the group's neck, there are bright spots. Sales have actually done well coming out of lockdown, although it looks like increasingly like Europe's heading for a second round of lockdowns, which would inevitably set things back.

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, which should help it recover in the long run - if the debt can be controlled. 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 and remember there are no guarantees.

AB InBev key facts

  • Price/Earnings ratio: 17.8
  • 10 year average Price/Earnings ratio: 19.3
  • Prospective dividend yield (next 12 months): 2.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results (underlying figures)

Global volumes rose 1.9%, reflecting a 2.6% improvement in AB InBev's own beer volumes, but weakness in non-beer and third party products. Volume grew in South America (14.7%) and North America (1.5%) and were broadly flat in the Asia Pacific region (0.5%). Volumes fell in Middle America (-3.3%) and in the Europe, Middle East and Africa region (-6.5%).

North American revenue rose 4.7% to $4.4bn and cash profits rose 8.0% to $1.8bn. In the USA AB InBev's revenue increased 4.5%, and cash profits rose 7.5%. The group gained market share, and Bud Light Seltzer and Michelob Ultra were stand out performers.

In the Middle Americas region revenue fell 0.2% to $2.6bn and cash profits fell 4.0% to $1.4bn. In Mexico revenue grew by double digits as the region recovered following prior restrictions, and cash profit growth was in the high-teens as margins expanded.

In South America revenue rose 19.5% to $1.9bn but cash profits fell 0.1% to $631m due to a large rise in costs. Volume growth was especially strong in Brazil at 25.4%. Foreign exchange movements held back reported results in some regions - notably in Columbia.

In the Europe, Middle East and Africa region revenue fell 3.3% to $1.9bn and cash profits fell 12.5% to $618m. In Europe revenue and cash profits rose by mid-single digits, driven by premiumisation. However, the recovery was held back in South Africa by a ban on alcohol sales.

The Asia Pacific region recorded revenue growth of 1.3% to $1.8bn, and cash profit growth of 3.6% to $650m. In China revenue grew 4.8% and cash profits 6.6%, led by the premium end of the portfolio.

AB InBev's revenue from Global Export and Holding Companies fell 19.7% to $168m, and made a cash loss of $173m - $45m more than last year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.