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Dividend Coverage Roundup: Beverage Industry FY 2018-19

|About: Diageo plc (DEO), FMX, KO

This report examines the capacity of beverage industry firms to cover their dividend payments, drawing from annual data to FYE 6/30/2019.

Firms reviewed are DEO, FMX, and KO (SIC 2080.2086) with a combined market cap of approximately $500B.

Cash flow management is overall positive, while recent revenue growth trends may signal economic slowdown, subject to qualifications noted.

All firms are heavily indebted which coupled with a downturn could spur policy rate cuts to provide debt service relief.

Tabular Results and Interpretation. The table below shows the results for Diageo (DEO) to FYE 6/30/19, Fomento Económico Mexicano dba FEMSA (FMX) and Coca Cola (KO) to FYE 12/31/18, followed by a quick interpretation of each category of analysis:

Dividend Coverage: The coverage variable is net free cash flow NFCF (as a percentage of annual company revenues). Positive (negative) values suggest enough (inadequate) cushion to cover dividends. A figure of zero suggests breakeven coverage.

Deviations (NFCF, Revenue Growth*; latest FY vs. prior): Negative values suggest a recent (1-year) worsening because the latest fiscal year’s value has moved below the prior period central tendency.* Zero or near-zero values suggest that the latest values are in line with historical.

Shifting Centrality (NFCF, Revenue Growth; 3-year): Here the baseline for a shift=1, not zero. Smaller values suggest secular deterioration. This category identifies any shift of each company’s own “core” performance (i.e. its own central tendency)* over the latest 3 years.

Coverage 2 (Dividends+Debt Service DDS): Positive (negative) values suggest an adequate (inadequate) cushion to cover DDS. Just as in Dividend Coverage (Coverage 1) above, the coverage variable is net free cash flow/revenues NFCF. Debt service, which is the sum of both principal and interest payments, is added to dividends; this combined figure may be abbreviated DDS or d+.

(*) Notes: Revenue growth is year on year (YoY) percentage change. The basis for this analysis is spatial, where the central tendency or “core” may also be referred to as “spatial centrality” or simply centrality.

For methodological and other details refer to the separate post titled Dividend Coverage Roundup: Background Notes referenced in the Author’s page.

Comparative Overview in Charts

The following charts display the data from the table above. Note that spatial centrality is also shown either by a zero (for Charts 1, 2, 3 and 6), or the figure 1 (for Charts 4 and 5).

Chart 1. Dividend Coverage. Although differences exist between the firms with DEO the apparent leader in coverage, the estimates here do not give a complete picture of the coverage of financing obligations: For a more comprehensive estimate (dividends and debt service together), see Chart 6.

Chart 2 and 3. Deviations (from Prior FY Centrality).

NFCF. In the most recent fiscal year, net free cash flow NFCF exceeds the firms’ own prior centrality.

REVG. As of the most recent fiscal year, revenue growth for all firms still falls short of their historical prior centrality although DEO has fallen the least.

Charts 4 and 5. Shifting Centrality (3-year)

NFCF. Over a 3-year period to the most recent fiscal year, net free cash flow either remains above or in line with its own historical centrality.

REVG. Over the latest 3-year period, DEO and FMX have kept close to their core of revenue growth, while KO has shifted downwards to a greater extent.

Note: The estimated revenue growth shift for KO of 0.95 above was left unchanged from the previous dividend coverage analysis of KO. However, the figure improves to 0.98 based on the default assumption of fat tails which is assumed for the other firms (see Methodology note below).

Chart 6. Dividends + Debt Service

A more comprehensive analysis of coverage requires examination of debt service, detailed in this section. Debt Service is the sum of principal and interest on debt obligations. Adding debt service onto dividends may result in significantly different conclusions about dividend coverage capacity since both compete for limited company funds, with debt service typically being contractual. The chart below shows the relative performance of the firms when coverage is estimated for dividends and debt service combined; the centrality is represented by zero. All firms appear to fall considerably short in coverage capacity.

Note: The FY 2018 analysis of DEO’s DDS coverage was based on a model that has been updated to the default assumption of fat tails: The updated FYE 6/30/2018 result for DEO is -0.42 (compared to -0.43 above) which suggests that coverage is virtually unchanged over the two fiscal years.

Qualifications. 1. Although all firms are categorized as “beverages,” differences between the firms should be recognized as indicated in part by their SIC codes (2080 for DEO and KO, 2086 for FMX). 2. Due to similarities in product lines, the revenue trends noted for KO and FMX may not stem entirely from economic conditions. 3. The basis for comparison between firms is less uniform due to the 6-month lag between the fiscal year ends of DEO and the other firms. 4. Notes regarding the model differences that may have affected revenue growth results for KO and DDS coverage results for DEO, are provided with Charts 5 and 6, respectively.

Methodology and other details are consolidated in a separate post titled Dividend Coverage Roundup: Background Notes, searchable or referenced in the Author’s page. For more recent analyses, a default assumption of fat tails is generally made in favor of higher-ranking distributions for reasons detailed in the methodology.

Financial Visualizations. For selected 3D stylized and other sketches of underlying theoretical models of selected companies, see the author’s page for links; given the qualifications and shortcomings, at the very least it is hoped that such models might be appreciated for their aesthetic value.

The author may also hold positions in securities of companies, including through ETFs, that are covered herein. The discussion and any visuals may contain significant errors, are subject to revisions and are provided 'as is' solely for informational purposes, not for trading or investment advice. This preliminary analysis is exploratory; no claims are made as to the validity of data, assumptions, theoretical models and methodologies; results may be based on prior data that do not reflect the most current market events.