Last week, Anheuser-Busch (NYSE:BUD) confirmed estimates for 2003 earnings of between $2.46-$2.49 per share, and the company expects to see 12% EPS growth in 2004. Do the math and that puts 2004 earnings in the $2.76-$2.79 range. Not bad for a stodgy beer brewer whose unit sales volume grew less than 1% year over year. Let's take a look at how the company's doing it.

Anheuser-Busch's earnings-per-share growth is driven by two major factors: a steady decrease in common shares outstanding, and a steady increase in net margins. Sales growth has averaged about 5% since 1998, due to higher unit volume and -- here's the important part -- higher revenue per barrel.

Price increases and reduced discounts to wholesalers have dropped directly to the beer maker's bottom line, boosting net income by an average of 11% annually over the past five years. Factor in the 15% reduction in outstanding shares through the third quarter of 2003 and you can see how Anheuser-Busch increased EPS by an annualized 14% between 1998 and 2003.

Quality top-line growth drove net margins from 11% in 1998 to 14% in 2002. The company did even better in 2003, increasing margins in each of the first three quarters. Its 2003 results will likely show a 15% net profit on full-year sales.

Some might consider the ability to steadily raise prices in such a competitive industry a miracle. But when one out of every two beers sold in the United States is an Anheuser-Busch product, the company has the power to make price increases stick.

The firm's dominance in this mature industry precludes it from generating superior EPS growth on sales volume alone. The company obviously knows this, choosing instead to focus on increasing margins and reducing share count to deliver shareholder value. With close to $2 billion in free cash flow for 2003, continued share buybacks should be a no-brainer, and so long as the pricing environment remains favorable, Anheuser-Busch can continue to provide above-average returns to shareholders.

You can post your thoughts on the Anheuser-Busch discussion board.

Chris Mallon owns shares of Anheuser-Busch through the Dynamic Investors Partnership, and can be found staring blankly into his navel waiting for e-mails at chrismallon@dynamicinvestors.net.