AB InBev dividend hit by SABMiller

AB InBev CEO Carlos Brito might be tempted to down a glass or two of Bud to see what that does to his outlook for his company. On Thursday, AB InBev halved its dividend to help cut the $100bn-plus debt acquired when it merged with SABMiller two years ago. It also announced earnings below market expectations. The share price fell 10%.

Even if AB InBev trades close to a five-year low, at 17 times next year’s earnings, it is not clear what can bring a rerating back to previous highs near 30 times. Much of the premium generated by the SABMiller deal from 2016 is long gone.

The dividend cut had been expected, and makes sense given a need to improve free cash flow and a currency mismatch. Nearly 60% of its debt is in US dollars, but much of its revenue is in emerging-market currencies. Reducing the dividend should add $4bn extra cash a year. That should reduce net debt by about half of earnings before interest, tax, depreciation and amortisation, thinks Bernstein Research, down from nearly five times.

Two decades of deals have transformed what was once a small Brazilian brewer called Brahma into an industry behemoth. But even if Brito sees the glass as half full, AB InBev has come to the end of this strategy and entered a new phase. If this were not a period of extreme market volatility, with the MSCI emerging markets index down nearly a quarter from its January high and more US interest rate rises expected, the brewer’s strategy might be a cause for cheer.

Rising incomes and youthful populations in emerging economies should support beer sales. But hyperinflation in Argentina, political uncertainty in Brazil and VAT increases in SA have all encouraged beer drinkers to stay on the wagon. It is hard to shift volumes, let alone raise prices in these conditions. At the same time, in the US it continues to lose market share. /London, October 25