Buy Constellation brands for strong brands and dividend growth

Consumers are often willing to pay more for brands they know and trust, which gives companies with well-known pricing power. Better pricing power often leads to better financial performance, which can lead to higher share prices.

Liquor companies with well-known brands often offer attractive returns. Constellation Brands Inc. (NYSE: STZ) is one of our favorite alcohol-related stocks because of the strength of its brands and the growth of its dividends.

Business Background and Recent News

Founded in 1945, Constellation Brands produces and distributes beer, wine and spirits. The company has more than 100 brands. It imports and sells beer brands such as Corona Extra, Modelo Especial and Pacifico. These brands contribute to making Constellation Brands the third largest beer producer in the United States in terms of market share. The company's liqueurs include Svedka vodka, High West whiskey and Casa's Noble tequila. His wine portfolio includes Robert Mondavi and Kim Crawford. The company currently has a market capitalization of $ 34 billion.

On April 3, Constellation Brands announced that it would sell about 30 brands of its wine and spirits portfolio to E. & J. Gallo Winery. The transaction will pay the company $ 1.7 billion, which it will use to repay its debt. The brands of wine and spirits sold include Clos du Bois, Black Box and Mark West. These brands are priced at $ 11 retail and less. This sale will give Constellation Brands a cash injection while allowing it to focus on its high-end brands of wines and spirits.

The company also owns 38% of the cannabis producer Canopy Growth (CGC) because of its $ 4 billion investment on April 15, 2018.

Recent financial results

Constellation Brands announced its financial results for the fourth quarter of fiscal year 2019 on April 5th. The company posted earnings of $ 1.84 per share, up 12 cents from the consensus estimate, but down 3% from a year earlier. Revenues increased 2.3% to $ 1.8 billion, exceeding expectations by $ 70 million.

For the year, Constellation Brands posted net earnings of $ 9.28 per share, up 6.7% from a year ago. Revenues also rose 6.7% to $ 8.1 billion.

Beer volumes and sales increased 8% and 9.3% in the fourth quarter. For fiscal 2019, volumes increased 9.7% and net sales improved 11.6%. Beer has been the main contributor to the US market.

Each family of imported brands experienced record volume levels. The Corona brand has shipped more than 150 million cases, while the Modelo brand has shipped more than 125 million cases. Constellation Brands is trying to capitalize on the strength of the brand by launching Corona Refresca, which will be the brand's first non-beer beverage, in the first quarter. The company also expects an increase in advertising spending for its leading beer-based products to help drive sales growth, which is expected to increase from 7% to 9% in FY2020. .

Wine and spirits volumes were down 9%, while sales were down 7.6%. For the year, shipments decreased by 0.8%, but net sales decreased by only 0.2%. A positive sign for this segment is a double-digit distribution growth for several brands, such as Kim Crawford, Ruffino Sparkling and Meiomi. Svedka Vodka, the number one imported vodka in the US, posted strong sales growth after Constellation Brands launched a new campaign to increase consumer awareness.

Constellation Brands expects earnings per share to be between $ 8.47 and $ 8.77 for fiscal year 2020. Achieving the mid-term goal of this forecast (8 , 62 USD) would represent a 7% decrease compared to the 2019 financial year. Much of this decline can be attributed to the company's investment in Canopy Growth and an expected decline of 25% to 30%. % of wines and spirits due to sale in Gallo. The stock closed the day trading up 6.6% after the publication of the results.

The company has increased its earnings per share by 17% over the last decade. We expect annual earnings growth of 10% over the next five years due to continued strength in the company's high-end product categories. If Constellation Brands is able to reach the expected growth rate, the company could earn $ 13.88 per share by the year 2025.

Recession recession

Over the last decade, Constellation Brands has posted impressive earnings per share growth, but is the company safe from recession? Below, the performance of Constellation Brands before, during and after the last economic downturn:

• Adjusted earnings per share 2007: $ 1.44
• 2008 adjusted earnings per share: $ 1.60 (increase of 11%)
• Adjusted in 2009 earnings per share$ 1.69 (5.6% increase)
• Adjusted in 2010 earnings per share: $ 1.91 (increase of 13%)
• Adjusted in 2011 earnings per share: $ 2.35 (increase of 23%)
• 2012 adjusted earnings per share: $ 2.19 (7% decrease)

Constellation Brands reported a 17% increase in earnings per share between 2007 and 2009, which was a very turbulent period for many companies. The company earns its income very well. In the past 15 years, it has only failed twice (2007 and 2012).

Due to its performance during the last recession, we are confident that Constellation Brands will be able to continue to grow its earnings during the next recession.

Dividend history, valuation and total expected return

Constellation Brands began paying its dividend only in 2015, so it does not have the reputation of a dividend king or dividend aristocrat. This does not mean that investors investing in dividend growth should ignore stocks. The following are the company's annual dividend payments:

• 2015 dividends per share: $ 1.24
• 2016 dividends per share: $ 1.60 (23% increase)
• 2017 dividends per share: $ 2.08 (30% increase)
• Dividends per share in 2018: $ 2.74 (32% increase)
• Forecast Dividends Per Share for 2019: $ 2.99 (9% increase)

Constellation Brands increased its dividend by 1.5% on the next payment in May. This is well below its usual increase. The company had increased its dividend by at least 20% in each of the last three years. On the basis of the new dividend, the shares have a return of 1.7%, which is slightly lower than the return of 1.9% of the S & P 500 index.

Constellation Brands has likely kept its dividend increase at a low level due to the amount of its investment in Canopy Growth. Once the debt resulting from this investment has been reduced, we expect dividend growth to remain robust.

Although the yield is low, the dividend is well covered. Using earnings per share, the average payout ratio is 25% since the company began paying a dividend.

Since dividends are paid from free cash flow, some investors prefer to use this measure rather than earnings per share to determine dividend security. During the 2019 fiscal year, Constellation Brands generated a record free cash flow of $ 1.4 billion. It distributed $ 558 million of dividends on common shares during the same period, a dividend payout ratio of 40% free cash flow.

Using either earnings per share or free cash flow, Constellation Brands has a very low payout ratio. It is likely that the Company will continue to offer compelling dividend growth over the next few years due to its low payout ratio.

Based on the current share price of $ 191 and expected earnings per share of $ 8.62 for the fiscal year 2020, Constellation Brands has a price / earnings ratio of 22.2. It should be noted that the current ratio is only slightly higher than the S & P 500's 21.5% price / earnings ratio.

We have a target price / earnings ratio of 18 for 2025, slightly above its 10-year average. If stocks were to return to this target, total returns could be reduced by 4.1% per year over the next five years.

Constellation Brands' total annual returns would consist of annual earnings per share growth of 10% and a dividend yield of 1.7%, somewhat offset by multiple reversal, which could reduce returns by 4.1%. per year.

As a result, we expect Constellation Brands shares to offer a total annual return of 7.6% over the next five years. If the company is able to produce the expected earnings per share by 2025 and if the valuation of the stock approaches our target, Constellation Brands shares could trade at $ 250 by 2025.

Conclusion

Constellation Brands offers a portfolio of renowned beers, wines and spirits. Corona and Modelo have become very popular with consumers. The placing on the market of a new Corona family drink and an increase in advertising should help improve the sales of this brand. Constellation Brands is also pruning its cheaper wines to focus on its high-end product line.

The company has not proposed a significant dividend increase, but has been willing to offer high dividend growth in previous years. Once the debt is reduced, it is likely that the company will regain double-digit dividend growth.

Even with a likely multiple pullback, investors buying Constellation Brands shares are expected to generate annual total returns in excess of one over the next five years due to dividends and expected earnings per share growth.

Disclosure: I am not long stocks mentioned in this article.

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