Constellation Brands (NYSE:STZ) and Anheuser-Busch InBev (NYSE:BUD) represent two different breeds of beer companies. Constellation Brands, not quite a household name, sells largely in the U.S. market, yet has earned a reputation as a fast-charging brand conglomerate, booking $7.3 billion in revenue last year. Anheuser-Busch InBev, the ubiquitous global powerhouse, boasted 2016 revenue of $45.5 billion, dwarfing all other beer-industry competitors. As dividend-oriented investments, however, these two brewers will combine quite nicely in your stock account. Let's find out why.
Constellation Brands: Accelerated revenue and dividend growth
Constellation Brands' fortunes began to ascend in 2013 after it acquired the rights to manufacture, market, and distribute the Mexican beer portfolio of Grupo Modelo (owned by Anheuser-Busch InBev) in the United States. Over the last three fiscal years, the company has seen its beer sales soar, and it's enjoyed an overall revenue CAGR (compounded annual growth rate) of 14.6% -- well in excess of the overall beer industry's current CAGR of 6%.
Constellation has clearly benefited from the increasing popularity of Mexican beers in the U.S.: Its brands like Corona, Pacifico, Modelo, and Victoria hold leading positions in the U.S. imported-beer market. But the company has also in large part created its own destiny. It's on pace to invest $4.5 billion in brewing-capacity expansion related to its Mexican labels during the four-year period ending in December 2019. This capital investment ensures that Constellation can meet market demand, and perhaps continue to record the double-digit growth of the past few years.
Another attractive aspect of Constellation Brands' business model is the company's penchant for acquiring premium wine, spirits, and beer brands, and scaling them through its manufacturing and distribution system. Two prominent examples are the acquisition of the best-selling Meiomi wine portfolio from Copper Cane Wines, and the $1 billion purchase of craft-beer house Ballast Point Brewing and Spirits. Constellation acquired both in 2015, and it's been able to increase shipments of their product lines considerably, contributing to overall revenue momentum.
Though the company tends to utilize excess cash flow for these types of acquisitions, it's recently begun to share a portion of cash returns with shareholders. Constellation issued its first dividend in 2015. Management raised the initial $0.31 quarterly dividend by 29% in 2016, and again by 29% in 2017, to a current quarterly payout of $0.51. Due to the dramatic rise in Constellation's stock price -- it's appreciated more than 86% since the beginning of 2015 -- the current dividend yield is just under 1%.
Thus, Constellation Brands' dividend power is obscured. It's possible that the yield will continue to appear meager relative to that of peers, due to Constellation's stock-price growth. But the company's aggressive payout hikes will certainly increase the yield on original cost for those who reinvest dividends. Through potential continued stock growth and the rising dividend, Constellation Brands provides the possibility of appreciable long-term total return -- not always easy to find in the beer industry.
Anheuser-Busch InBev: Market dominance and attractive yield
Anheuser-Busch InBev closed its massive, nearly $114 billion acquisition of SABMiller in October of last year. Before the merger, Anheuser-Busch and SABMiller were already the largest and second-largest global brewers, respectively. Their combined annual volume of roughly 708 million hectoliters is slightly larger than the combined output of the world's next eight largest brewers.
According to management, the merged entity holds the No. 1 position in eight of the world's ten largest beer markets. While Anheuser-Busch markets innumerable well-known labels, the company is focusing on extending market share primarily through its three dominant global brands: Budweiser, Stella Artois, and Corona.
As the company continues to expand its annual beer volume, it projects that it will realize roughly $2.8 billion in annual cost synergies from the SABMiller deal within the next three to four years. Some of these projected cost savings will be utilized to reduce balance-sheet leverage. Anheuser-Busch InBev carries a net-debt-to-EBITDA ratio of 5.5, versus 2.5 prior to its debt issuance to complete the SABMiller transaction. The company intends to pay back borrowings over time to reduce this ratio to a target of 2.0.
On the organization's most recent earnings conference call, CFO Felipe Dutra noted that over the long term, Anheuser-Busch InBev expects to reward shareholders with a "growing flow" of dividends, given the company's predictable, "non-cyclical" business and stable cash flows. But in the short term, as the brewer reduces its post-merger debt load, shareholders can expect dividend adjustments to be "modest."
Of course, given a current yield of 3.6%, modest bumps to an already rich dividend should be welcomed by most shareholders. Anheuser-Busch InBev's enviable market dominance means that it can focus on targeted strategic acquisitions and margin improvements -- both of which can result in more operating cash to be distributed to investors. The stock offers a prospect of decent total return with minimal worry.
Taking advantage of two very different dividends
If Anheuser-Busch InBev offers safety and moderate growth in a beer-industry dividend, Constellation Brands represents an opposing thesis of accelerated growth and ultimately, higher risk. But there's no need to pick one over the other. Pairing them allows the investor a blended dividend return, from two companies which together account for boundless potential in the global beer market.