Is This Liquor Giant’s New Dividend Worth a Shot?

After recovering from some rocky balance sheets in 2011, liquor distributor Beam (NYSE: BEAM  )  announced, last week, the arrival of a $0.20 per share quarterly dividend. To sweeten the deal, the company is offering to pay a full year's dividend to investors on Dec. 3. Beam, home to Makers Mark, Jim Beam, and Pinnacle Vodka, may seem in good spirits now, but is this new dividend a tactic worth toasting, or a warning sign of hangovers to come?

Surviving Fortune's Slings and Arrows
For Beam, 2011 was a year of transition. While it was originally included in consumer brands company Fortune Brands, that company split in two in October: Fortune Brands Home & Security, and Beam. The changeover was not without its growing pains for the company, but Fortune did not plan to leave Beam sputtering in the gutter, a shadow of its former self. The ultimate point of the spin-off strategy, according to Beam's annual report, was to give the liquor company an undivided focus that would lead to long-term growth and improved stockholder value.

President and CEO Matthew Shattock appeared well suited to take on this task, having previously served as brand developer and COO for consumer goods manufacturer Unilever. With his experience and ideas at the Beam helm -- including distribution deals with Pinnacle Vodka and Japanese whiskey distributor Suntory, along with the release of new products such as Red Stag -- it seemed evident that the company would be very capable of rolling with the punches.

Since October, Beam appears to have weathered the storm, its quarterly net profit and gross profit margins holding strong at 13% and 46%, respectively. Now that the company has steadied itself, the next logical step is to rally investor morale and expand even further. A dividend is a great way to inspire that kind of support, and assure shareholders that any blemishes on recent financial records were only a temporary awkward phase.

Faring Against Its Rivals
Beam may also aspire to tackle its boozy competitors, including Diageo (NYSE: DEO  ) , the London-based distributor behind Johnnie Walker, Smirnoff, and Ketel One. The spirits industry has many more potential prize fighters, including Svedka vodka's Constellation Brands (NYSE: STZ  ) , Jack Daniels' Brown-Forman (NYSE: BF-B  ) , and Central European Distribution (Nasdaq: CEDC  ) of Grant's Whisky fame. Let's take a look at how Beam currently measures up to them.

Company

Net Annual Income

Free Cash Flow

Net Profit Margin

Payout Ratio

Dividend Yield

Beam

$915 million

$1.2 Billion

32%

14%

1.4%

Diageo

$1.2 billion

$940 million

15%

28%

2.4%

Constellation

$445 million

$231 million

15%

0%

0%

Central European Distribution

($1.2 billion)

$198 million

(147%)

0%

0%

Brown-Forman

$513 million

$410 million

17%

57%

1.5%

Source: Company 10-K's for 2011 & S&P CapIQ for Cash Flow LTM

Beam's net income from Dec. 2011 may not seem like a cause for worry, but a closer look at the income statement shows that the company beefed up this figure by including $782 million in Income from Discontinued Operations, better known as the Fortune transition. Without this cushion, Beam's 2011 net income would be a paltry-by-comparison $133 million.

In terms of quarterly performance, Beam is by no means failing, but it is not completely out of the woods yet, either. The net income for Q2 was $100 million, down from $330 million last year, before the changeover. Because of a decrease in earnings per share, its quarterly payout ratio rose to 32% while the net profit margin sank to 13%. Additionally, Beam burned close to $11 million in free cash flow by the end of Q2. This is actually an improvement, compared to the $31 million it lost in Q2 of 2011.

But all is not lost for our buddy Jim. Yes, the company has a long way to go before it catches up to Diageo. However, the fact that it even has a hat in the ring right now, after a huge reorganization, is an impressive feat. It will be exciting to see where Beam goes from here, now that its feet are planted on the ground.

The Verdict
Contrary to popular belief, booze is not necessarily a recession-proof industry. Setbacks can befall even the best of companies, but Beam has proven itself well equipped to weather the storms of restructuring. After taking a minute to dust itself off, the company is now poised to reach similar heights as its competitors -- eventually, anyway. By introducing a dividend, Beam is extending an invitation to anyone who wants to come along with them and enjoy the ride. It sounds appealing but, please, always remember: invest responsibly.

Fool contributor Caroline Bennett does not own shares of any company mentioned in this article. Motley Fool newsletter services have recommended buying shares of both Beam and Diageo. A Motley bunch of Fools are we, so we believe that covering a wide range of opinions helps us become better investors. The Motley Fool has a disclosure policy, and if you don't read it, we'll be dis-close to calling you a sissy.


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