Over the past 52 weeks, the best performing brewer trading on a U.S. exchange is AmBev (NYSE:ABV), up 46% while Anheuser-Busch InBev (NYSE:BUD), which owns 91.1% of AmBev, is down 8%. AmBev's been on a relative tear the past year and since both companies are part of the same family, it would seem sensible to recommend investing in the parent rather than the child. However, being quite the contrarian, I believe AmBev, despite its good run, is still a better investment. Here are three reasons why. (To help you invest in the long run, read 10 Tips For The Successful Long-Term Investor.)
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As of the second quarter, AmBev's total debt is $3 billion compared to shareholder equity of $14.7 billion while Anheuser-Busch InBev's current total debt is $45.4 billion compared to shareholder equity of $36.8 billion. Ambev's debt-to-capital-ratio is one-third its parent. However, it's not that straight forward. All of AmBev's financials are consolidated within its parent so you first must strip out those numbers. By doing so, you'll see that the difference is even more profound. Anheuser-Busch InBev's revised debt-to-capital ratio is 66%, 11 percentage points higher than with AmBev included. I'm not an expert on consolidated financial statements but it's clear the Latin American business is a critical piece of BUD's global empire.
In the first six months of the year, AmBev's revenues were $7.2 billion, 38% of Anheuser-Busch InBev's $19 billion. This was a 4.8% increase year-over-year in Brazilian Reais and 4.3% in U.S. dollars. Including these results, Anheuser-Busch InBev increased revenues 8.3% in the first half of the year. Without them, the increase was actually 11.3%. Much of the difference can be attributed to AmBev's poor Canadian results, which are included under the parent's North American operations. Are you lost yet? Hold on, we're getting to the good part.
AmBev and Peers
|Company||Return on Invested Capital (TTM)|
|Anheuser-Busch InBev (NYSE:BUD)||5.9%|
|Boston Beer (NYSE:SAM)||33.6%|
|Molson Coors (NYSE:TAP)||7.0%|
Return on Invested Capital
Here is where it becomes apparent why I believe AmBev is a better buy. According to Morningstar, AmBev's return on invested capital for the trailing 12 months is 26.6% compared to 5.9% for Anheuser-Busch InBev. But remember, BUD's numbers include AmBev's results. We need to take that out to compare the two. Ambev's net income in the first six months was 4 billion Reais or $2.3 billion. Annualized that's $4.6 billion divided by its total invested capital of $17.5 billion for a ROIC of 26.3%. That's very close to Morningstar's number, which isn't converted into dollars. Now for BUD, I've taken its earnings before interest and taxes (EBIT) for the first six months of the year ($5.9 billion) and subtracted AmBev's EBIT of $2.9 billion plus 35% taxes, which equals $1.8 billion. Annualized, it comes to $3.6 billion and a ROIC of 5.6%. In both cases, the results were slightly less because of the currency difference. What's important is to understand that InBev was able to buy Anheuser-Busch for $52 billion (a lot of debt) in 2008 in large part thanks to its extremely profitable Latin American and Canadian beer subsidiaries. I wouldn't go as far as to suggest AmBev is keeping the rest of BUD's business afloat, but it's certainly helping pay the interest on its $45 billion in debt.
The Bottom Line
AmBev's paid 56 cents a share in common dividends through the end of June. In the final six months of 2010, it paid 70 cents a share. It's reasonable to assume the total dividends paid out in 2011 will be $1.26 or possibly higher. That's a yield of 3.9% based on its September 13 closing price of $32.31. Just as important, its stock's outperformed the S&P 500 in nine out of the past 11 years. If you're looking for quality, this is it.
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