AB InBev’s hard-to-swallow $100bn hangover
The world’s biggest brewer is to re-base its payout to much-reduced €1.80 a share this year — but it had to be done
AB-InBev has cut its dividend. This will naturally have investors looking to drown their sorrows, but it was the right thing to do, nonetheless.
The world’s biggest brewer said on Thursday that it would re-base its payout to €1.80 a share, this year, a mighty cut from the €3.60 in 2017. It had little choice. Before the reduction, analysts at Bernstein had forecast that net debt at the end of this year would be 4.6 times earnings before interest, taxes, depreciation, and amortisation (ebitda). That’s way above the three times at which investors start to get jittery. AB-InBev’s own goal is to bring net debt down to about twice annual earnings.
The big question is whether it’s gone far enough. Finance director Felipe Dutra says halving the dividend will save about $4bn a year, all of which will be used to cut borrowings.
The revised payout will be covered more comfortably by earnings. But it will make only a modest dent in the net debt, which was an eye-watering $108.8bn at June 30 – a legacy of its 2016 purchase of SABMiller.
AB-InBev’s borrowings are typically higher in the middle of the year because cash flow is stronger in the second half. Even so, more financial firepower might be needed to make a big difference. Analysts at Jefferies estimate that net debt to ebitda will still be 3.8 times in 2020
And there are no sign of trading in the beer business improving. Third-quarter revenue and ebitda missed the consensus of analyst expectations, as the company suffered from adverse currency effects in Brazil, Argentina and SA. There were higher commodity costs, too, for example, in aluminium. Meanwhile, the company is battling still to revive sales of its mid-market beer brands in US, as drinkers turn to premium and local alternatives. That could lead to earnings forecasts being trimmed too.
Dutra says the brewer has steered a middle course between a chunkier reduction in the dividend and maintaining a payout to investors. That, of course, includes its two big shareholders: tobacco giant Altria Group and Columbia’s Santo Domingo family, for whom the dividend is a vital source of cash. There’s also no impending liquidity crunch
No company likes to cut its dividend. But investors and analysts were braced for it. Even so, the performance of the business made it a bitter brew to swallow. The shares fell as much as 11% in early trading on Thursday.
If they have to cut again, you’d have to seriously question the wisdom of the $100bn creation of “Megabrew” with the purchase of SABMiller.