Dripping Budweiser

The Drip Portfolio has been around for quite some time (in Internet years, anyway). Jeff Fischer sent the first check in to buy a share of Intel (Nasdaq: INTC) way back in August of 1997.

And what have we seen since then? The final 30 months of the greatest bull market in history, and the painful 29-month (and counting) bear market. The net result has both the S&P 500 and Nasdaq indexes very, very close to their levels on the day Jeff mailed the check. Yes, we can just about call the last five years a wash -- at least in regards to the market averages.

Most stocks don't follow the averages, though. Many are way down, and some are even out: bankrupt. And many are much higher than they were five years ago, including a company the Port was considering back then, Anheuser-Busch (NYSE: BUD). Anheuser-Busch was one of the food and beverage companies reviewed, but the Port managers ultimately decided to buy Campbell Soup (NYSE: CPB) instead (and, much later, PepsiCo (NYSE: PEP)). I thought it would be instructive to see why the managers eschewed Anheuser-Busch, what happened in the ensuing four years, and if there's anything we can learn from the experience.

A-B C's
Anheuser-Busch has been a rock-solid, dependable company for 150 years. It has outperformed the S&P 500 by a substantial margin over the past one-, three-, five-, 10-, and 20-year periods. Its flagship Budweiser is the world's largest-selling beer brand, and Bud is number two in the U.S. behind its little brother, Bud Light. Those two, combined with the company's other big names like Busch, Michelob, and O'Doul's, account for almost half of the domestic market share, far ahead of rivals Miller (slated to be sold to South African Breweries by Philip Morris (NYSE: MO)) and Coors (NYSE: RKY). I believe Anheuser-Busch's brands are a gold mine, and that its management is top-notch. The company exhibited strong pricing power when it was able to raise prices earlier this year in the face of a weak economy.

When Jeff reviewed the company for the Drip Port back in '97, he was impressed with its operating margin of 18.6% and net margin of 10.7%, which placed it among the top companies in the world in that respect. Since then, things have only gotten better as these margins have climbed to 21.3% and 11.4%, respectively.

Jeff's main beef with the beer king was its large amount of debt and what seemed then to be a mediocre long-term growth rate of 9%. Let's look at both of those issues.

Debt
Our Foolish rule of thumb is to favor companies with little or no debt, and for good reason. Should a company begin to drown in financial difficulties, a large amount of debt acts like a steel anchor and can send the stock into a "death spiral." For example, a company may have certain "triggers" tied to their debt obligations that would force it to immediately pay back millions to its creditors in the event of a credit downgrade. And in general we just think there are better uses for cash than paying interest.

However (and you just knew there was a however), companies can use debt to their advantage, and that's certainly been the case with Anheuser-Busch. It has used the money to make acquisitions and fund capital expenditures that fueled growth and improved efficiency. According to the latest 10-K, the company targets a ratio of cash flow to total debt in the 30%-40% range, and that number currently sits at 38.5%. Its debt will likely stay in this range for the foreseeable future.

Growth
Although Anheuser-Busch was looking at a five-year growth rate of 9% five years ago, it exceeded that by increasing earnings at a 10%-11% clip. Looking at the boom-bust cycle during that time, this is quite an achievement. When the market tanked, companies like Anheuser-Busch were looked at as "defensive" plays and hardly missed a beat. Indeed, you can't really tell when the economy turned south by looking at a BUD five-year chart.

Why was the company so strong through this period? Because people are not likely to cut back very much on beer and alcohol purchases, even during bad times. If Jeff could have predicted the economic woes that were to rack the globe, he would've taken that 9%-11% growth rate in a heartbeat. Ah, the benefit of hindsight!

Finally, here is a snapshot look at Anheuser-Busch, then and now.

Ticker: BUD
                               Then      Now
Split-adjusted price:         $21.50    $52.00

Trailing 12-month sales:      $11.0 B   $13.1 B

Trailing 12-month
operating earnings:           $1.18 B   $1.77 B

Trailing 12-month
EPS (split-adjusted):         $1.18     $1.97

Enterprise value to sales:     2.29      3.48

P/E:                           18.4      26.4

LT expected growth rate:        9%       11%

Yield:                         2.40%    1.40%

As you can see, the company is a bit more richly valued now, but that's not unusual considering it has increased its margins and its growth rate.

As I mentioned, the Portfolio managers passed on Anheuser-Busch and wound up buying Campbell Soup. Campbell worked out poorly, and was sold last December at a 40% loss. Anheuser-Busch, meanwhile, gained 140% in value.

Even though it's hard to fault the managers for sticking to their guns about debt, we'd be in better shape now if we'd bought BUD. But we'll have many, many such regrets over our investing lifetimes, and there's just not much we can do about it. We'll not get them all right. But if we can learn from our past and increase our investing knowledge along the way, we'll be just fine in the end... where it really counts.

Rex Moore believes that product sampling is an important part of researching Anheuser-Busch. At press time he owned shares of Anheuser-Busch. The Motley Fool's disclosure policy goes well with beer nuts.