Why Anheuser-Busch InBev may cut its generous dividend
The Belgian beermaker pays its shareholders way more than the industry average, yet its $109bn debt is much higher. This is clearly unsustainable
Anheuser-Busch InBev is the most generous big food-and-beverage company in the world when it comes to paying cash out to shareholders. That largess could end as soon as next week.
The reason? The Belgian beermaker is the most indebted company in the industry, in both absolute terms and relative to earnings. Some analysts see the company slashing its dividend so it can use the cash to pay down its $109bn mountain of debt, much of which it took on for the blockbuster acquisition of SABMiller in 2016.
So AB InBev’s high debt level is not new. What is new is that the company’s cash flow has been hurt by the plunge in emerging-market currencies, which also has sent its share price lower. The decision by Moody’s Investors Service on October 1 to place the company’s debt rating on review for a possible downgrade boosts the chances of a dividend cut, according to Paul Steegers of Bank of America Merrill Lynch, potentially when AB InBev releases earnings October 25.
“AB InBev’s debt sticks out like a sore thumb,” says Jonathan Fyfe, an analyst at Mirabaud Securities who has a buy recommendation on the stock. “The board is motivated to keep the dividend but there is a genuine question mark over whether that is really in the best interests of the company.”
An AB InBev spokesperson did not have an immediate comment about its plan for the dividend. The beermaker has said that deleveraging as a higher priority than its dividend. While CFO Felipe Dutra said in July that AB InBev aimed to reduce net debt to about two times earnings, the multiple is now almost five and actually ticked up in the first half. The average large food and drink company has net debt of about two-and-a-half times earnings, according to data compiled by Bloomberg.
AB InBev may cut its dividend by 50% and keep it at that level for three years, Steegers wrote in an October 8 note.
Paradoxically, a reduction in the payout ultimately may encourage equity investors, in part by making it easier for the company to pay off its debt, said the analyst, who has the equivalent of a sell rating. “If dividends are kept unchanged, we would expect the sell-off in shares to accelerate,” he added.
AB InBev has been paying a dividend of €3.60 a share for the past several years, which is equal to almost 5% of the current share price and about double the average for food and beverage companies. Nine analysts have cut their dividend estimates in the past month, according to data compiled by Bloomberg.
It is possible the company eliminates the dividend entirely for a year, with a promise to resume paying it at the previous rate, said Trevor Stirling, an analyst at Sanford Bernstein. The initial reaction in the stock market to a cut could be strongly negative, as funds that focus on dividends would sell the shares, he said.
Still, in the medium term investors would be encouraged by the accelerated debt reduction, he said. That may help AB InBev eliminate the discount in the company’s price-earnings ratio relative to other companies in the industry, he said.