Emerging markets woes: AB-InBev halves its interim dividend
Emerging markets have always spelt “volatility”. There have been ups and downs. This year quite a few emerging markets have stumbled and AB-InBev is bearing the brunt. As was expected by many analysts, AB-InBev felt compelled to cut its dividend on 25 October 2018, as it reported weaker profits and lower volumes in several of its key markets in the third quarter 2018.
The Belgian company halved its dividend, saying its focus was now on paying down debt which still stands at over USD 100 billion, following its pricey takeover of SABMiller in 2015.
Its interim dividend will be EUR 0.80 per share compared with EUR 1.60 (USD 1.83) a year ago. The brewer also said that it intends to propose a final dividend of EUR 1.00 for fiscal 2018, which would result in a total dividend payment for the year of EUR 1.80 per share.
For shareholders, dividend cuts are not a positive sign. However, some analysts pointed out that in the long run the move could help the company’s balance sheet, and build confidence in the debt market – a prerequisite if AB-InBev were to make another big acquisition.
The cut in dividend will allow AB-InBev to save about USD 4 billion this year – in 2017 it paid over USD 9 billion in dividend –, which it will use to pay down debt and return to a “comfort zone” of about 4 times net debt to EBITDA at the end of 2019. Its debt load was 4.87 times EBITDA at the half-year mark. Most companies will feel comfortable only if their debt-to-profit ratio is 2 times EBITDA.
The dividend announcement came as the brewer reported results for the third quarter which had missed analysts’ forecasts.
In the July to September quarter, AB-InBev’s turnover declined to USD 13.28 billion from USD 14.74 billion. AB-InBev reported a profit of USD 956 million, compared with USD 2.06 billion in the same period a year earlier. Results were dragged down by one-time items and losses tied to some hedges. Adjusting for these, profit was USD 2.23 billion, compared with USD 2.34 billion a year earlier.
AB-InBev has become the latest victim of the emerging markets blues. As The Wall Street Journal wrote, AB-InBev’s problem is to a large extent caused by the US Federal Reserve Bank, which has hiked interest rates, thus negatively impacting emerging market currencies. Various emerging market currencies have seen a plunge in their value in relation to the US dollar. AB-InBev achieves 70 percent of its profits in emerging markets, which need to be converted into US dollars. In the past AB-InBev’s exposure to emerging markets would have been a safe bet for rising sales and profits. Not any longer.
Add to that AB-InBev’s high debt pile and you can see a problem looming. The group’s big businesses in Brazil, Argentina and South Africa have been hit hard, as capital has flowed back to the United States.
In the US, AB-InBev’s big brands continued to decline, resulting in market share losses of 0.35 percentage points for Budweiser and 0.9 percentage points for Bud Light. On the bright side, Michelob Ultra continued to grow sales. Overall, the company’s North America organic volumes dropped 0.5 percent in the quarter, while its US market share declined by 0.5 percentage points.
In Brazil, volumes dropped 3.3 percent although turnover climbed 2.1 percent thanks to higher prices. The company launched a new affordable brand in the country’s northeast, which is brewed with cassava.
In South Africa, volumes and turnover both declined as consumers cut back after tax and petrol price increases earlier this year.
In China, sales of the Budweiser brand grew strongly, helping AB-InBev report a 1 percent rise in volumes there.
Despite a previous announcement that it was done shopping for craft breweries, AB-InBev said that it remains open to more M&A.
Both Heineken and Carlsberg seem to have performed better in the third quarter.
Heineken reported on 24 October 2018 that its organic beer volumes climbed 4.6 percent, helped by strong growth in the Americas, Africa, the Middle East and Eastern Europe.
Also, on 24 October 2018, Carlsberg revised its earnings estimates upwards for the year, saying a warm summer in western Europe and good progress on its cost saving plan had resulted in a stronger-than-expected third quarter.
