Be sure to check out our detailed stock analysis (click here). With the Fed planning to keep rates at historical lows through 2015 and Treasuries barley covering inflation, I'm led to search for yield in unique places. This includes turning to beer and liquor to solve my problems. There is no denying that alcoholic beverages are a favorite in tough economic times, helping us drown our sorrows, but they are also popular in a booming economy, being a fundamental part of helping us enjoy our successes. There are a couple of the stocks below that I believe are growth and income plays.
My top pick in the liquor industry is Diageo PLC (NYSE: DEO), which has a number of lower-end, reasonably priced choices, while also catering to the high-end consumers. Key brands for the London-based company include Smirnoff, Johnnie Walker, Captain Morgan, Tanqueray, Crown Royal and Guinness. Smirnoff is its leading brand by volume and Johnnie Walker the leader by value. Last quarter, Diageo posted organic revenues growth of 5%, with solid performance in Africa. Latin America is also performing well, where volume for the region was up 2% year over year and the company hopes to further penetrate emerging markets. It has also acquired over 50% of India's largest spirits company, United Spirits Ltd. The positive of this acquisition is the fact that India is the world's most populous country.
The big draw to Diageo is not just its 2.4% dividend yield, but its valuation and industry leading operating margin. Diageo's trailing twelve month operating margin is 34%, compared to top peer Beam's 25% (see how Diageo stacks up head to head versus Beam).
BEAM Inc (NYSE: BEAM) is the world's fourth largest premium spirits company, and the second largest in the United States. Top brands include Jim Beam (bourbon), Maker's Mark (bourbon) and Courvoisier (cognac). One positive for Beam is its geographically diverse revenues. Markets outside of North America make up around 44% of sales, with 22% derived from Europe, the Middle East and Africa, and another 22% from Asia and South America.
Beam's predecessor, Fortune Brands, helped position the company with a nice balance sheet standpoint. Fortune had sold off its golf business and spun off its home and security business in 2011, using the proceeds of $1.1 billion to pay down debt. Although Beam has the best balance sheet, with a long-term debt to equity ratio of 44%, compared to Brown-Forman (69%) and Diageo (99%), its valuation and recent performance make the company relatively unattractive. Last quarter results showed weakness, with EPS of $0.67 coming in below the $0.71 consensus estimates and below the $0.69 posted in the same quarter last year. However, billionaire Bill Ackman still has a large part of his hedge fund invested in Beam after his activist campaign at Fortune Brands (check out all of Akcman's stocks).
Brown-Forman Corporation (NYSE: BF-B) is one of the leading producers and distributors of premium alcoholic beverages in the world. Key brands include Jack Daniel's, Southern Comfort and Finlandia. Last quarter earnings came in at $0.80 per share, up 10% year over year, with the big news being upgraded 2013 guidance. Its outlook for 2013 now includes full year EPS in the range of $2.58 to $2.70, up from its earlier guidance of $2.40 to $2.67. Also, the company raised its forecast for operating income growth to low-double-digits from high-single-digit growth. The company is building a new manufacturing facility in Alabama to help meet improved demand for Jack Daniel's whiskey barrels, while also strategically re-positioning its Japan distribution facility in an effort to better capture market share.
Although its dividend yield is rather low, at 1.5%, Brown-Forman has paid quarterly cash dividends consecutively for the past sixty-seven years and has been increasing it for the last twenty-nine years. There are many positives for Brown-Forman, but the real hindrance for considering Brown as a top liquor stock is its "expensive" valuation and low dividend yield when compared to Diageo.
What about the beer makers?
Anheuser-Busch InBev NV (NYSE: BUD) is the world's largest brewer and Molson Coors Brewing Company (NYSE: TAP) the fifth largest global brewer. In the beer category, I think Molson might well be the best pick given its valuation and balance sheet strength. Molson is a result of the 2005 merger between Molson Inc. and Adolph Coors Co.
Recently quarter results showed that Anheuser's earnings were down 5% year over year; this despite revenue being up 8%. Forward guidance was also bleak for the company, where it expects weakness in its key market, Brazil. Anheuser is the market share leader in the country with 69% of the market. The big news of late for Anheuser Busch includes its acquisition of the 50% of Modelo it does not already own. The transaction woud establish Crown as a fully owned entity of Constellation, and provides Constellation with independent brewing operations, Modelo’s full profit stream from all United States sales and rights in perpetuity to the Modelo brands distributed by Crown in the United States.
Molson also has over half the long-term debt to equity ratio (43%) as Anheuser's 95%. All-in-all, Molson has over sixty-five brands that include low priced options and craft brews. The company has implemented various cost saving initiatives that include closing underperforming breweries to do away with inefficiencies The company also has a synergy program named Resources for Growth Two, which has helped the company save $172 million over the last three years. Part of the Resources for Growth strategy includes combining its UK and Ireland business with its newly acquired Central Europe organization for a singe operating unit in Europe.
While consolidating certain underperforming assets, Molson has also been upping it exposure to high growth markets. This includes acquiring Sharp's Brewery and Doom Bar brands in 2011, which added the Modelo brands to its U.K. portfolio. Its acquisition of nine StarBev breweries in 2012 enhanced its portfolio with premium brands of StarBev and gave the company expansion opportunities to the emerging markets of Czech Republic, Hungary, Romania, and Bulgaria. Molson has also been a leader in returning capital to shareholders, having increased its dividend payment at a 15% compounded annual growth rate for the last five years (read more about this turnaround stock and others).
Dividends & Valuation
Diageo and Molson have the top dividend yields in the industry:
- Beam 1.5%
- Brown-Forman 1.5%
- Diageo 2.4%
- Anheuser-Busch 1.6%
- Molson Coors 2.6%
These two companies also have solid dividend payout ratios:
- Beam 33%
- Brown-Forman 42%
- Diageo 42%
- Anheuser-Busch 34%
- Molson Coors 52%
As far as valuation, Diageo is the cheapest liquor stock on a forward price to earnings basis, trading at 17 times, compared to Beam (21 times) and Brown-Forman (23 times). On the beer side, Anheuser, trades at 18 times forward earnings, but Molson-Coors is the cheapest beer stock at only 11 times.
Don't be fooled
It appears that both of the highest dividend yielding alcoholic beverage companies, Diageo and Molson-Coors, might also be two of the industry's best picks. Both are the cheapest for their relative segments, and have been looking to tap the emerging markets for growth opportunities. Diageo yields 2.4% and Molson 2.6%, while also having payout ratios that are less than 55% each.