Anheuser-Busch InBev set to close SABMiller acquisition… and is good news for Molson Coors. A London Court recently approved Anheuser-Busch InBev's (NYSE:BUD) acquisition of SABMiller (SAB.L) and while its set to create a beer colossus that dominates the competition, it will nonetheless benefit smaller rivals like Molson Coors (NYSE:TAP).
To wit, as a condition of obtaining regulatory approval for the deal, SABMiller was required to sell Coors its 58% stake in the MillerCoors joint venture that it formed with Coors in 2008. Following the buyout, Coors will own 100% of a company that generated $1.33 Billion in Net Income - on revenues of $7.73 Billion - in 2015, effectively doubling its size.
On the basis of MillerCoors' past disclosures (and netting out one-off charges), Coors stands to see a $770 million contribution to its Net Income from the MillerCoors buyout - nearly doubling the $3.76 per share that it earned a year ago.
These incremental earnings won't necessarily translate to higher dividends for Coors investors immediately since the company's acquisition of the rest of MillerCoors will require it to issue a considerable amount of debt to meet the $12 Billion purchase price. Consequently, Coors' management has indicated that it will revisit its dividend policy 'once deleveraging is well underway," seemingly precluding any dividend increases in the immediate future.
Nonetheless, this is still positive news for dividend investors since it sets a higher base for its future payouts. To illustrate: Coors' 2017 income is estimated to grow by 71% compared to 2016. Coors' current dividend payout ratio is around 51%. In a hypothetical scenario where Coors decided to pay dividends on its estimated $5.62 per share for 2017, its dividend would rise to $2.87 per share. That's equivalent to a dividend yield of 2.66% - better than both the S&P500's and the 1.9% average of its peer group.
Our theoretical dividend represents a considerable improvement on Coors' current dividend yield of 1.52%, which is around 60-basis points lower than the S&P500's dividend yield and is among the lower dividend yields for listed brewers. It also serves as an illustration of the potential rewards that patient investors can look forward to.
The anticipation of the MillerCoors buyout has helped to boost Coors' share price by nearly 15% in the year to date. Given this and the fact that Coors' dividend isn't expected to rise until it can pay down a substantial portion of its leverage, should investors still consider buying its shares? Let's take a look.
Dividend and Outlook. Apart from the earnings boost, the MillerCoors acquisition will be a game-changer for Coors since it will enable it to fully-control (it previously had an equal 50-50 vote) the Miller portfolio globally - in addition to US import brands such as Peroni. At the same time, it will allow Miller to set the direction of its operations in its largest market, the United States, where it has a 26% market share. Despite this, the outlook is still muddy - beer's share of the alcoholic beverage market in the US has drifted down by 3 percentage points (from 54% to 51%) from 2010 to 2014 as consumers shift their preference to higher alcohol full calorie beers, wine, spirits and other alcoholic beverages.
Coors expects this trend to continue in the coming years - though it's probably hoping that it won't come to mirror Europe where beer has just 36% of the market. In any case, a falling share of the overall alcoholic beverage market coupled by just 1% growth of the beer market itself This doesn't give us confidence that the larger Coors entity (i.e. 'current' Molson Coors and MillerCoors) will see much revenue growth going forward. In fact, both entities saw their Net Sales decline in 2015 and 2016 looks like another year of declining net sales - even though sales of Coors Light remain healthy and the company is anticipating that innovative products such as flavored beers, alcoholic iced teas and premium beers will help drive revenues.
Still, the important thing for shareholders to consider is that a larger Coors entity that is in control of its key franchises will be better able to weather a secular declines in key products - it will also be better able to utilize its brands to establish meaningful positions in growing markets - China, for example, is expected to become the world's largest beer market by 2017.
Another thing that investors should take note of is the impact the MillerCoors deal will have on Coors' balance sheet. Currently, Coors' financials are rock-solid. In terms of both liquidity and leverage, Coors beats the industry average by a significant margin with nearly $2.44 of working capital for every dollar of debt and just $0.31 of debt for every dollar of equity. This will change significantly with the MillerCoors acquisition - the expected deal would raise its leverage to around par with its equity and reduce its working capital to around 1x its current liabilities. In fact, Moody's downgraded Coors' credit rating from Baa3 to Baa2 in anticipation of the MillerCoors buyout.
Of course, this doesn't really tell us anything new: the ultimate result of a weaker balance sheet is a reduction in shareholder payments and Coors' management has already indicated that it doesn't anticipate increasing dividends for the foreseeable future. That being said, we don't believe that the MillerCoors acquisition will cause a reduction of its dividend - the resulting change in Coors' financial profile merely shifts its balance sheet metrics from above average to industry average.
Coors is currently trading at a trailing Price-Earnings ratio of 56-times earnings and this is entirely understandable since the market is now anticipating the earnings of a combined MillerCoors entity. Our estimate for the new entity's earnings in 2017 is $5.65 per share so, on this basis, Coors is only trading at 19-times its forward earnings - just a slight premium to the S&P500's forward ratio. The common perception is that alcoholic beverage stocks are counter-cyclical in nature - but Coors' own financial disclosures suggest that the decline in its revenues can, in fact, be attributed to "partially attributed to poor economic conditions."
Of course, merger and acquisition activity is usually accompanied by promises of cost synergies and the MillerCoors buyout is no different - it's expected to contribute around $450 million in combined cost synergies and tax benefits to Coors over the next 4 years. That translates into additional earnings per share of $2.06 per share by 2020 and potentially $0.72 per share by next year alone - in that sense, there could be upside to our forecast of as much as 13% - meaning Coors could report earnings of $6.37 per share next year. If we applied a 19-times earnings multiple to this, we get a target price of $121.03 per share - slightly less than the $125.71 consensus price target. This implies an upside of 12.4%.
As it stands, while Coors' dividend is nothing to write home about, the potential for higher payouts down the road is very high - as we've already illustrated. We also see its currently low dividend yield as an overall positive since it's a product of the company thinking ahead and realizing that it will need to rebuild its balance sheet following the MillerCoors buyout. In the face of a recent ratings downgrade, we see this as a prudent course of action that gives us confidence that Coors' management will manage the integration of MillerCoors appropriately.
All things considered, we believe that Molson Coors' buyout of MillerCoors is a huge positive for shareholders - provided they're patient enough to wait for the benefits to emerge.
Disclosure: I am/we are long TAP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.