Brown-Forman (BF.B) produces and markets quality alcoholic beverages, including Jack Daniel's, Canadian Mist, Southern Comfort, Finlandia Vodka, Woodford Reserve Bourbon, Early Times Whisky, Old Forester Bourbon, Fetzer wines and Korbel California champagnes. Its 35 brands are sold in over 135 countries, including the United Kingdom, Australia, Mexico, Poland, Germany, France, Spain, Italy, South Africa, China, Japan, Canada and Russia. BF.B was founded in 1870 and has survived Prohibition, the Depression, major recessions, competition and changes in consumer preferences. Sales in FY2010 were over $3.2 billion with EPS of $3.03.
This "sin stock" has an outstanding record of growth. The compounded annual growth rate for EPS was 12% over the last 35 years. In all fairness, that measure slowed to 6% in the 5 last years (growth was limited by the economic crisis around the world). In the last 10 years, sales doubled, EPS almost tripled, the dividend more than doubled (with a modest payout ratio under 40%), the stock tripled and BF-B has recently become an S&P 500 Dividend Aristocrat.
In fiscal Q3 (ending January 31, 2011), sales were $962 million and diluted EPS rose 32% to 96¢. Q3 results saw accelerated growth above the first half which included improving sales in the U.S. For the first nine months of FY2011, diluted EPS increased 10% to $2.77 on sales of $2.6 billion. The company had broad-based growth in developed and emerging international markets. Growth for sales and gross profits in the first nine months of FY2011 was led by strong performances in oversea markets, including Australia, the U.K., Mexico, Turkey, Germany, France and Brazil, which more than offset soft performances in the U.S. and Russia. In Q4 FY2011, BF.B expects to benefit from broad-based sales growth, gross profit growth, geographic expansion and innovation. Based on a strong Q3 and its better-than-anticipated first nine months, FY2011 guidance for EPS was raised to $3.35-3.45 (excluding a projected 20-30¢ gain on the sale of Fetzer Vineyards). Analysts are forecasting EPS of $3.39 in FY2011 and $3.69 next year.
BF.B is planning for its 15th decade of growth. Ten years ago, it had 2,750 employees with only 9% based outside the U.S. Today 41% of 3,900 employees are based outside the U.S. BFB controls 1% of the global spirits market and is relatively new to the global marketplace. For example, nearly 75% of the global whiskey market is sold in markets outside the U.S., but only half of the Jack Daniel’s whiskey volume is. International growth potential remains tremendous.
In order to grow share in the U.S., BF.B expects to be more successful in the non-whiskey categories and the development of tequila, vodka, and liqueur liquors. Markets outside the U.S. will be most important for growth over the next 10 years. Brazil, Russia, India and China (BRIC) and other emerging markets will gain in importance. BF.B also sees strong growth from more developed economies such as France, Australia, Germany and Poland.
Brown family shareholders control voting stock and have helped foster strong values (integrity, authenticity and independence) over 14 decades. The Wall Street Journal reported that governance experts considered Brown-Forman a “model” for family-controlled companies involving family shareholders in the business.
Financials are strong, with $0.5 billion of debt versus $1.9 billion of equity. BF.B has more than nine million treasury shares and will purchase up to $250 million of additional treasury stock this year. There are two classes of common stock; both trade on the NYSE. Class A shares carry voting privileges (controlled by the Brown family), while the Class B shares are non-voting stock. In Q4 2010, the quarterly dividend was increased 7% to 32¢, the 65th consecutive year of quarterly dividends and the 27th consecutive year of increases. In December, BF.B paid a special dividend of $1.00 per share and the quarterly dividend which should have been paid in January 2011 was paid in late December 2010. As a result, five quarterly payments plus an extra dividend were paid in calendar 2010. But as the annual dividend is listed as $1.28, S&P may not let the extra dividends break the streak of higher annual dividends.
Few companies can match this long track record of growth, which BF.B expects to continue in this decade. I'm a drinker of Diet Coke (where I've put my money). While Coca Cola (KO) stock's has an excellent record of growth, BF.B stock has performed even better. The future looks excellent for this $68 stock with a 1.9% yield. BF.B is a growth stock to drink to!
Brown-Forman: 10 years