Corporate beer has struggled for years, and rightfully so. The industry has consolidated into just a few massive companies that own large stables of brands, and consumers have responded by giving their support to upstart regional and local craft breweries. Since 2013, the number of U.S. brewers has more than doubled from 2,952 to 6,372 at the end of 2017, according to industry support group Brewers Association.
As the economy has recovered from the financial crisis, consumers have also been ponying up for more expensive alcohol like wine and spirits. That has also put a damper on the biggest beer companies' growth and profitability. However, signs are emerging that a pullback in consumer spending is right around the corner, and more affordable drinking options offered by the biggest beer makers could start getting some love again. Plus, valuations are cheap, and the dividend yields are attractive. That could make corporate beer a great way to play stock market defense.
Image source: Getty Images.
When bigger is better
When it comes to beer stocks, it isn't hard to put together an exhaustive list -- even though there are more brand choices than ever. That's the result of years of acquisitions and mergers between brewers, leaving just a handful of publicly-traded names to choose from.
|
Company |
TTM Revenue |
Trailing Price to Earnings |
Forward Price to Earnings |
Dividend Yield |
|---|---|---|---|---|
|
Anheuser Busch InBev (BUD +0.23%) |
$56.4 billion |
21.1 |
16.8 |
5.5% |
|
Molson Coors (TAP 1.40%) |
$10.9 billion |
8.2 |
11.9 |
2.7% |
|
Constellation Brands (STZ 2.40%) |
$7.9 billion |
16.3 |
21.2 |
1.3% |
|
Heineken (HEINY 0.57%) |
$26.0 billion |
21.3 |
18.3 |
1.5% |
|
Diageo (DEO 1.20%) |
$16.1 billion |
20.6 | 21.4 |
3.0% |
|
The Boston Beer Company (SAM 9.59%) |
$917 million |
32.9 |
30.3 |
N/A |
|
Craft Brew Alliance (BREW +0.00%) |
$212 million |
23.0 |
32.9 |
N/A |
Data source: Yahoo! Finance.
The first two listings, Anheuser-Busch InBev and Molson Coors, control about three-quarters of the U.S. beer industry. They also happen to fetch the lowest valuations and have some of the highest dividend payouts. Diageo is better known for its spirits like Captain Morgan, Smirnoff, and Johnnie Walker, although it's included here because it makes Irish stout Guinness.
Not all beer makers are created equal, though, and some of the stocks above could go cyclical in an economic downturn. Craft names like Sam Adams maker Boston Beer Company and craft collective Craft Brew Alliance -- which owns names like Red Hook, Widmer Brothers, and Kona Brewing -- hang their hats on growth strategies rather than on value. Their valuations are thus also substantially higher than the industry average.
The same goes for Constellation Brands, a diversified owner of spirits, wine, and its flagship Corona and Modelo beers with several regional craft makers riding sidecar. The company has also been investing in cannabis-infused beverages through Canopy Growth Corporation. That's all fine and well, but the higher valuations for these companies could prove problematic for investors looking for stability if growth were to suddenly slow. For a defensive play, I like the hated corporate beer stocks.
Image source: Getty Images.
Let me buy you a Bud, or a Coors
Both A-B InBev and Molson Coors continue to manage the resulting operations from the mega-merger that created them in their current forms. A-B InBev bought out SABMiller in 2016, a deal that was contingent on SABMiller's stake in joint venture MillerCoors being sold back to Molson Coors. Post deal, both companies have started to realize cost savings from their dividing of spoils, and sales have been shored up to weather the craft brew onslaught. Add in a couple of years of stock underperformance, and both now sport attractive valuations and dividend yields.
Growth outside of acquisitions has been modest, but it's there. A-B InBev reported organic growth of 0.7% through the first six months of 2018, which contributed to 4.7% more revenue and 8.3% more earnings than a year ago. As for Molson Coors, revenue over the same time period decreased 2.2%, but higher pricing and lower costs helped earnings increase 30.1%.
For investors who may be concerned that buying these stocks means a bet on subpar mass-produced beer, there's more going on in these mega-breweries than what's immediately apparent. Both have craft brewery subsidiaries that they own. Though A-B InBev is best known for Budweiser, it's also the home of craft brands like Goose Island and Elysian; and Molson Coors owns Blue Moon, Terrapin, and Revolver, among others. In following Constellation Brands' early move, Molson also recently started a joint venture in Canada to develop a cannabis-infused beverage.
Though big beer has been out of favor for some time now, attractive valuations, slow-and-steady diversified business models, and good dividend payments make these stocks worth a look for investors looking to play defense in a choppy market.
