Growth through acquisition has been the name of the game for the world's biggest beer brewer, Anheuser-Busch InBev (NYSE:BUD). You don't wind up owning 400 different suds brands without an activist M&A strategy.
However, scooping up SABMiller and others left the company with $109 billion in net debt -- a fairly heavy bar tab -- and as MarketFoolery host Chris Hill and MFAM Funds' Bill Barker explain in this segment of the podcast, management was a bit too optimistic in its forecasts of how the company would be paying it down.
A full transcript follows the video.
This video was recorded on Dec. 5, 2018.
Chris Hill: Question from Tom Smith in Antioch, California. This is from a few weeks ago. Tom writes, "I'm just wondering if you had any thoughts about Anheuser-Busch InBev's announcement that they're cutting their dividend by 50%." I'm not a shareholder of AB InBev. I probably saw that headline, but it completely flew by me.
Bill Barker: You're not even particularly a user of AB InBev.
Hill: I'm not even remotely a user of AB InBev, or any similar beer products.
Barker: I've got some thoughts. But better than my thoughts are the thoughts of Nate Weisshaar, our colleague at MFAM Funds, he follows the stock closely. It's not a good sign whenever somebody is cutting the dividend. Why are they doing that in this case? Because they made a miscalculation in racking up the amount of debt they did to make the acquisitions that they have of about $109 billion in net debt. And they've got to pay that off. There's not an immediate danger. They've got that debt stretched out over more than a decade. But in 2020, they do have a fair amount of it that's rolling over. So it behooves them to get some of that paid. By cutting the dividend, they freed up a significant amount of additional cash a year to pay that.
But the original program was, "Hey, we've made these acquisitions. It's going to work out. We're going to be able to keep the dividend. We're going to be able to raise the dividend. And, we're going to be able to pay off all this debt." And that story has now changed.
Hill: I'm reminded first and foremost of General Electric, when the first dividend cut came earlier this year. What was basically said by everyone was, "Well, this is the right move." This may, in fact, be the right move for AB InBev, as well. But, to your point, yeah, I almost want to linger when that happens and say, "Wait a minute, let's talk about what led to this point." Even if it is the right move, and even if it works out in the end, someone really blew the math on this one.
Barker: Yeah. They blew it in the sense of trying to grasp where the beer market was going. People are, to a degree, exiting the beer market, or the at least the portion that Budweiser -- AB InBev is Anheuser-Busch -- Bud and Bud Light are diminishingly relevant beers. As big as they are, as many Super Bowl ads as they will buy, as much as we all care about Bud Bowl, nevertheless.
Hill: I was going to say, as much as we care this time of year about the iconic Clydesdales commercials for the holidays. Who doesn't love those?
Barker: Oh, sure. So I was at an investor conference a couple of years back. I know I've spoken about this on the podcast, so I'll try to talk more quickly than I normally do, which listeners will be happy about. Anyway, this guy got up there, and he had 20 minutes to give the spiel. And mostly, what he talked about was the Budweiser commercials on the Super Bowl, as if this was a company that produces commercials which incidentally lead to the sale of beer.
Hill: [laughs] Wait, this was a Budweiser executive?
Hill: At an investor day? Just standing up talking about, "Look how great our ads are?"
Barker: It was, I think, a highly relevant item about "Hey, should you be investing in our company? Well, let me tell you about our ads on the Super Bowl. People really love them." Look, why else are people drinking Budweiser? They're drinking it because they grew up drinking it or because they are inundated with ads for it. So it is a highly relevant part of the business, as it is for Corona. They've done very well with their ad campaign, or, had been doing well. There's beginning to be weakening in Corona and Stella. Look, it's a huge thing. People still drink a lot of beer. But a lot of the incremental beer-purchasing is going to higher-end micro-brews and things like that. The cut that is left for Budweiser is diminishing.
Hill: They're cutting their dividend, and on top of that, when you look at the stock, it's down about 30% year to date. You and I were talking the other day about J.M. Smucker, and I made the point that that stock is basically flat for the last five years. Compared to AB InBev, that looks phenomenal. That's tremendous outperformance.
And, by the way, say what you want about J.M. Smucker, they have steadily increased their dividend over that five years. If you're a shareholder, you're not necessarily getting the returns, but in terms of an increasing dividend, you have to be happy about that. On the flip side, if you're an AB InBev shareholder, that's got to be one of the top three reasons you own this stock.
Barker: Yeah. A lot of institutional accounts are investing specifically for the dividend and have as a thesis for why they hold the stock that it is going to be a growing dividend story. And that story is either over or temporarily halted or some variant of that, enough so that there are a lot of accounts that say, "We're no longer going to stick around." And that may well have created an interesting enough entry point that people can get behind. It's trading at the very bottom of its 52-week range. As you say, it's off substantially for the year. I'm not saying that all of this leads to a story that you wouldn't necessarily want to look into today, but it's had negative returns for five years.