Updated March 19, 2021 by Bob Ciura
The Dividend Aristocrats are a group of 65 companies in the S&P 500 Index with more than 25 consecutive years of dividend increases.
Within the Dividend Aristocrats there are different types of stocks with different returns. Some of the Dividend Aristocrats have higher yields, but these high-yielders tend to increase their dividends at a lower rate each year.
At the same time, there are dividend aristocrats with low returns. While these may seem unattractive at first, they often offer higher dividend growth from year to year. An example of this is Brown-Forman (BF.B), a dividend aristocrat who has increased his dividend for 37 straight years.
There are currently 65 Dividend Aristocrats, including Brown-Forman. You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with metrics like dividend yields and price / earnings ratio) by clicking the link below:
Brown-Forman has paid a dividend for 76 years and has raised the dividend at a high rate historically. Over the past 10 years, the company has increased its dividend at an average annual growth rate of ~ 9%.
The dividend increase last year was only 3% due to the macroeconomic uncertainty due to the coronavirus pandemic. Assuming the global economy continues to recover, investors can expect Brown-Forman’s dividend growth to accelerate as well. This article explains Brown-Forman’s business model, growth prospects, and valuation.
Jack Daniel’s Tennessee Whiskey started back in 1865 when Jack Daniel bought Cave Spring Hollow. The following year he registered the Jack Daniel Distillery, which is now America’s oldest registered distillery.
Brown-Forman has a large product portfolio that focuses on whiskey, vodka and tequila. The best-known brand is Jack Daniel’s flagship whiskey. Other popular brands are Herradura and El Jimador Tequila and Finlandia Vodka.
Source: Investor Presentation
Brown-Forman announced its third quarter (fiscal 2021) results on March 4th. The company announced that it had revenue of $ 910 million for the period, an increase of 1.3% over the company’s revenue for the same quarter last year. Brown-Forman’s earnings were above analyst consensus, outperforming it by $ 9 million.
Sales have been negatively impacted by exchange rate headwinds, so it’s important to note that underlying net sales or organic sales increased more than 1% for the quarter and 2% this fiscal year. Brown-Forman’s earnings per share were $ 0.45 for the third quarter, slightly above consensus analysts’ estimate and beating consensus by $ 0.02. The quarterly profit decreased compared to the previous year and decreased by 5% compared to the same quarter of the previous year.
The economic downturn triggered by the coronavirus pandemic weighed on Brown-Forman last year. In the long term, however, Brown-Forman should continue to benefit from its leading portfolio of brands with growth in new products and geographic markets.
Brown-Forman has a strong growth record. In the last financial crisis, the company was even able to increase earnings per share because the demand for alcohol isn’t particularly cyclical. From 2010 to 2020, Brown-Forman increased earnings per share by an average of 7%. Earnings per share were determined by a combination of several factors, including revenue growth, rising margins, and the impact of a decline in the number of stocks.
Thanks to the fact that Brown-Forman owns strong brands and operates in the super and ultra-premium alcoholic beverage markets that are experiencing constant market growth, Brown-Forman should be able to maintain its sales growth in the future.
This has been a major growth driver for Brown-Forman in the past. Brown-Forman’s Jack Daniels brand and American super premium whiskeys continue to grow worldwide.
International business has been the main growth driver for currency-neutral sales in the past few quarters and is likely to remain a key growth driver in the future.
Higher total sales enable margin increases due to better economies of scale, which makes the company more efficient overall and has a positive impact on the growth rate of net profit.
In addition, Brown-Forman has been aggressively repurchasing shares over the past decade, which is driving additional growth in business results. There is still plenty of room for growth going forward as the company continues to expand its product line both inside and outside of its flagship brand, Jack Daniels. For the next five years we forecast an annual growth in earnings per share of 7%.
Competitive advantage and recession performance
Brown-Forman has many competitive advantages. The popular brands offer significant pricing power. And it has a highly profitable business with low manufacturing and distribution costs due to its global size. These properties help Brown-Forman achieve consistently high returns on invested capital.
Brown-Forman is also very resistant to recessions. This is typical of alcohol stocks as their products tend to be consumed in greater amounts during difficult economic times. One could argue that alcohol manufacturers actually perform well during recessions.
Brown-Forman’s earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 0.76
- 2008 earnings per share of $ 0.77, up 1.3%
- 2009 earnings per share of $ 0.82, up 6.5%
- 2010 earnings per share of $ 0.95 (up 15.9%)
As you can see, the Great Recession has made the company grow earnings per share every year. This is a rare feat that demonstrates the company’s defensive business model. Put simply, liquor makers like Brown-Forman are among the most recession-resistant companies out there.
Valuation and expected return
Based on our estimate for 2021 earnings per share ($ 1.75) and a current share price near $ 69, Brown-Forman’s shares currently trade at a P / E of 39.5.
That is a very large multiple, even considering the strength of Brown-Forman’s business. We estimate the P / E ratio at fair value to be 24.
Should the stock fall back on 24x earnings, this means the potential for valuation headwinds of -9.5% over the next five years. On this basis, the evaluation appears particularly stretched, even according to Brown-Forman’s high standards.
A strong earnings growth rate (7%) and a dividend yield of 1% will help, but reducing the valuation of the security to a more “normalized” level would effectively wipe out the overall medium-term return potential.
Investors should note that Brown-Forman will occasionally pay a special dividend. For example, Brown-Forman paid a special dividend of $ 1.00 per share in 2018. Previous Brown-Forman’s special dividends were paid in 2012 and 2010, so this is not something the company does every year.
Overall, Brown-Forman’s expected return is -1.5% per annum. A negative expected return turns the stock into a sale.
Brown-Forman has a dominant position in its core product categories. Jack Daniel’s flagship brand would continue to lead the whiskey industry, with high growth from smaller whiskey brands and tequila. Emerging markets are also an attractive catalyst for growth and, of course, the dividend growth streak is enviable.
Brown-Forman is a fine example of great business with an exceptionally high valuation. If the stocks continued to trade at more than 30x earnings, the total return potential would be average. However, this is a speculation that we don’t like to do right now. Despite a solid dividend and very strong business, stocks don’t seem particularly compelling to buy right now.
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