Anheuser-Busch InBev (NYSE:BUD) recently announced that its $100-plus Billion mega-merger with SABMiller (SAB.L) was now expected to close by Oct. 10 with the new entity set to trade the following day.
The definitive closing date announcement strongly suggests that Anheuser-Busch has received a firm indication that its two largest shareholders, Altria (NYSE:MO) and the Santo Domingo family of Colombia, will be accepting Anheuser-Busch's offer for their SABMiller shares (which combine for 41% of SABMiller). The deal has already received approval from twenty-three territories, including the United States, South Africa, the EU and China.
Dividend and Outlook
Once completed, the Anheuser-Busch-SABMiller deal will create the behemoth in the global beer market with a 30% market share and over $66 Billion in combined annual revenues and $11.8 Billion in net income (based on the two companies' latest disclosed results)
Naturally, Anheuser-Busch investors who've circled the October 10 merger date are probably wondering what will become of their dividend. After all, Anheuser-Busch is the highest-yielding stock in its immediate peer group with an annual dividend yield of 3.67%. This means that investors who purchased $10,000 worth of Anheuser-Busch shares could look forward to around $367 a year in passive income. That's not something that's easy to give up, particularly as Anheuser-Busch has long been considered a stalwart defensive stock (i.e., people continue to drink beer regardless of the economic cycle or perhaps because of the economic cycle).
Whether the new company will continue to pay dividends is uncertain - a number of factors such as the need to conserve cash following the merger could prevail. That being said, it's not unreasonable to expect some kind of dividend, since both companies have paid dividends recently and are quite profitable. In fact, SABMiller just recently paid a 71.196p dividend to its shareholders for an annual dividend yield of 1.62%.
The deal is more of an acquisition than an exchange of shares so if we simply get the weighted average the two companies' respective dividend yields based on their respective market capitalizations, we get an annual dividend yield of 3.01%, which could very well be what the "Megabeer" new company's managers will be targeting.
Another approach we can take is to look at how much the companies have paid in dividends relative to their Earnings Before Interest Tax Depreciation and Amortization (EBITDA). Based on their latest financial reports, the two entities paid 39.7% of their combined EBITDA to shareholders.
If we assume that the two entities will bring in around $66.45 Billion in combined revenue over the next year (which would be flat against their current combined revenues) and further assume a 36.5% EBITDA margin, then the two entities could be slated to pay $9.64 Billion in dividends in their first year as a new entity based on their combined dividend/EBITDA ratio of 39.7%.
This payout, in turn, equates to an annual dividend of $2.98 per share based on the companies' combined share count, which would mean a dividend yield of 3.04% based on the two companies' weighted combined share price of $98.03/share. This is roughly on-par with the 3.01% average dividend yield we discussed earlier.
So basically, the dividend yield of the new company would be lower than Anheuser-Busch's current dividend -- but it would be considerably higher than SABMiller's and also remain the highest for its peer group.
Would the combined entity be cheap? Based on the combined numbers and if we assume that the new company earns $11.8 Billion in its first year (i.e., the combined net income of the two companies), then its P/E ratio would be roughly 27x its trailing earnings. That's far less than the 52x that Anheuser-Busch carries as a standalone entity and on par with SABMiller's current P/E ratio.
That would still be considerably more than the current P/E ratios of both the Dow Jones and the S&P500. However, analysts estimate that Anheuser-Busch's stand-alone earnings will grow by 24% in 2017. There's also the fact that Anheuser-Busch expects annual savings of $1.4 Billion from the merger. If we combine the estimated top-line growth and savings and use the resulting figure as the basis for the new company's forward earnings, then the new company's forward P/E falls to 16.6x -- or below that of both major market indices. Investors should bear this in mind when buying Anheuser-Busch stock -- with the merger a fait accompli at this stage, they're essentially buying the new company so their analysis shouldn't be limited to how Anheuser-Busch looks on its own, today.
Going forward, it's difficult to predict where the new company will land, but it's worth noting that the global beer market is expected to grow to $688.4 Billion by 2020. A 30% share of that market -- which is what Anheuser-Busch's new company is expected to have -- implies revenues of $206.5 Billion by 2020. That would imply 38% annual revenue growth over the combined $66 Billion earned today, which seems a bit high - but even a revenue growth rate of half of that (i.e., 19%) would be nearly triple the 6.9% growth rate for the next five years that analysts have predicted for a standalone Anheuser-Busch.
Of course, the biggest looming challenge for large beer interests is that the growth is eaten up by the Craft Beer phenomenon. However, it's difficult to see a neighborhood and niche market phenomenon somehow eating up $130-plus billion of the global beer market.
All things considered, we would be buyers of Anheuser-Busch's shares. At this point, investors would be buying not Anheuser-Busch but the new Anheuser-Busch/SABMiller entity, which would be the world's biggest alcoholic beverage company, carry a strong 3% dividend and potentially have 20% revenue growth (or more) over the next three and a half years. Who wouldn't want to own a piece of that defensive stock?
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BUD over the next 72 hours.
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.