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Why AB InBev May Cut Its Generous Dividend, in Four Charts

Albertina Torsoli
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Why AB InBev May Cut Its Generous Dividend, in Four Charts

(Bloomberg) -- Anheuser-Busch InBev NV is the most generous big food-and-beverage company in the world when it comes to paying cash out to shareholders. That largess could end as soon as next week.

The reason? The Belgian beermaker is the most indebted company in the industry, in both absolute terms and relative to earnings. Some analysts see the company slashing its dividend so it can use the cash to pay down its $109 billion mountain of debt, much of which it took on for the blockbuster acquisition of SABMiller Plc in 2016.

So AB InBev’s high debt level isn’t new. What is new is that the company’s cash flow has been hurt by the plunge in emerging-market currencies, which also has sent its share price lower. The decision by Moody’s Investors Service on Oct. 1 to place the company’s debt rating on review for a possible downgrade boosts the chances of a dividend cut, according to Paul Steegers of Bank of America Merrill Lynch, potentially when AB InBev releases earnings Oct. 25.

“AB InBev’s debt sticks out like a sore thumb,” says Jonathan Fyfe, an analyst at Mirabaud Securities Ltd. who has a buy recommendation on the stock. “The board is motivated to keep the dividend but there is a genuine question mark over whether that is really in the best interests of the company.”

An AB InBev spokeswoman declined to comment on the dividend, and pointed to the company’s recent statements about its plans for using its cash.

The beermaker has said that deleveraging as a higher priority than its dividend. While Chief Financial Officer Felipe Dutra said in July that AB InBev aims to reduce net debt to about 2 times earnings, the multiple is now almost 5 and actually ticked up in the first half. The average large food and drink company has net debt of about 2.5 times earnings, according to data compiled by Bloomberg.

AB InBev may cut its dividend by 50 percent and keep it at that level for three years, Steegers wrote in an Oct. 8 note.

Paradoxically, a reduction in the payout ultimately may encourage equity investors, in part by making it easier for the company to pay off its debt, said the analyst, who has the equivalent of a sell rating. “If dividends are kept unchanged, we would expect the sell-off in shares to accelerate,” he added.

For the past three years, AB InBev has been paying a dividend of 3.60 euros a share, equal to almost 5 percent of the current stock price. That’s about double the average yield for big food and beverage companies. Nine analysts have cut their dividend estimates in the past month, according to data compiled by Bloomberg.

It’s possible the company eliminates the dividend entirely for a year, with a promise to resume paying it at the previous rate, said Trevor Stirling, an analyst at Sanford C. Bernstein Ltd. The initial reaction in the stock market to a cut could be strongly negative, as funds that focus on dividends would sell the shares, he said.

Still, in the medium term investors would be encouraged by the accelerated debt reduction, he said. That may help AB InBev eliminate the discount in the company’s price-earnings ratio relative to other companies in the industry, he said.

(Updates to add AB InBev declining to comment in fifth paragraph.)

--With assistance from Joshua Fineman.

To contact the reporter on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Phil Serafino, Thomas Mulier

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