Brown-Forman (BF-B) owns one of the most iconic alcoholic beverage brands in the world – Jack Daniel’s Tennessee Whiskey.
The company has enjoyed substantial growth over its rich operating history. The number of Jack Daniel’s cases sold by Brown-Forman increased from 600,000 in 1965 to roughly 15 million cases in 2015, and the stock’s market cap grew from $110 million to roughly $20 billion over that same time period.
Dividend investors have also enjoyed more than 30 consecutive years of dividend increases from the company, and we expect many more dividend raises in the years to come.
Brown-Forman has earned extremely high Dividend Safety (93) and Dividend Growth (87) ratings, and it’s certainly a business we would like to consider for our Top 20 Dividend Stocks portfolio.
Brown-Forman was founded in 1870 and has built up a portfolio of leading alcohol beverage brands, including Jack Daniel’s whiskey and Finlandia vodka.
Spirits account for 95% of the company’s sales, with wine representing the remainder of the business. This is a big change in mix compared to 20 years ago when spirits and wine were just 55% and 13% of sales, respectively (the remaining 32% was consumer durables).
By geography, 43% of Brown-Forman’s 2015 sales were generated in the U.S., 38% in international developed markets, and 19% in emerging markets. The company’s products are sold in approximately 160 countries around the world.
Brown-Forman has built up the biggest American whiskey brand in the world. The company has consistently poured advertising dollars into its Jack Daniel’s family of brands to build and maintain strong consumer awareness. During its 2015 fiscal year, Brown-Forman invested $437 million in advertising, which represented more than 10% of the company’s total revenue.
With an operating history dating back over 100 years and billions of advertising dollars cumulatively spent, Brown-Forman has created a loyal following of consumers who have developed a preference for the taste of its whiskeys. This has helped the company consistently raise prices and maintain excellent profit margins.
Maintaining high awareness of the Jack Daniel’s brand has helped Brown-Forman profitably grow into new categories as well. The company can introduce new products and line extensions that leverage the Jack Daniel’s brand to quickly win new business. For example, the company’s introduction of Jack Daniel’s Tennessee Honey, a flavored whiskey, has generated strong growth the last few years.
Importantly, Brown-Forman has built an extensive distribution network that ensures its products are reaching the right customers in the right places. Replicating this network, which reaches roughly 160 countries worldwide, would take competitors decades of time and cost millions of dollars of expenses. When Brown-Forman launches a new product, it can plug it into its distribution system to get it on the shelves quickly.
The spirits market is also highly fragmented. According to International Wine & Spirit Research, the top ten biggest spirits companies have less than 20% market share on a volume basis. This fragmentation provides Brown-Forman with opportunities to introduce new products and acquire competitors’ brands to continue growing.
Growth has not been a problem. According to Brown-Forman’s 2015 annual report, the Jack Daniel’s family of brands has grown volumes at a 7% compound annual growth rate since 1956.
However, the company actively manages its portfolio of brands and is not afraid to divest underperforming ones. Most recently, Brown-Forman sold its Southern Comfort and Tuaca Brands for about $544 million.
Brown-Forman has the strongest American whiskey brand in the world and has done an excellent job building its brand equity and converting it into growth for many decades. With a continued focus on advertising, new product introductions, and deeper penetration in international markets, Brown-Forman has plenty of opportunity to continue talking share in the fragmented spirits market.
Brown-Forman’s Key Risks
Consumer tastes unexpectedly evolve over time, which can hurt or hamper demand for Brown-Forman’s products. Most recently, bourbon sales in the U.S. have increased by more than 35% over the last five years and by 50% in international markets.
The surge in whiskey sales has certainly served as a driving force behind Brown-Forman’s business over the last five years, but it’s less clear how the next five years will play out. There is risk that the rate of growth slows more than the market expects.
Consumer trends are simply unpredictable. According to Brown-Forman’s 2015 annual report, American whiskey was a declining category from 1970 to 2010 as consumer tastes moved toward white spirits. Where demand goes from here is anyone’s best guess, but Brown-Forman’s business is concentrated in a single category, which creates concentration risk.
Beyond consumer trends, foreign currency exchange rate fluctuations (about 60% of Brown-Forman’s sales are in markets outside of the U.S.) and volatility in consumer spending can impact Brown-Forman’s near-term results. However, we believe these are transitory factors that have no bearing on the company’s long-term earnings power.
Finally, it’s worth mentioning that Brown-Forman is still largely a family-owned business. The company has a dual-class share structure, and its board of directors mostly consists of insiders. While creating shareholder value has not been a problem at all for Brown-Forman, it’s worth keeping the family ties in mind for corporate governance purposes.
Overall, as long as the American whiskey category continues to see growth and Brown-Forman continues investing in its Jack Daniel’s brand, it’s hard to find many fundamental risks with the business.
Dividend Analysis: Brown-Forman
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Brown-Forman’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Brown-Forman’s dividend payment is extremely safe with a Dividend Safety Score of 93. The company’s score is helped by its relatively low payout ratio, which sits at 37% over the last four quarters. As seen below, Brown-Forman’s payout ratios have historically been around 40%, which is extremely healthy for such a steady business.
In addition to its low payout ratios, Brown-Forman’s Dividend Safety Score is helped by the stable nature of the alcoholic beverage market. As seen below, the company’s sales fell by just 4% during the financial crisis, highlighting the non-discretionary nature of whiskey (consumers have a craving for whiskey whether times are good or bad). The business has also recorded 5% sales growth in each of the last five fiscal years despite the tepid growth of the global economy.
Thanks in part to the company’s steady sales growth, Brown-Forman has been a free cash flow machine. The business has generated positive free cash flow in each of the last 10 years and has seen free cash flow per share rise by more than 50% over the same time period, helping fuel its dividend growth.
Brown-Forman has also generated a return on invested capital of at least 19% for more than a decade. Few businesses have demonstrated such strong profitability, and this is usually the sign of an economic moat. In Brown-Forman’s case, the company benefits from strong pricing power resulting from its branding.
Taking a look at the balance sheet, Brown-Forman’s debt load has increased recently to fund its $1 billion share repurchase plan. However, the planned divestiture of its Southern Comfort and Tuaca brands will add some cash to the business, and we have already noted the stable free cash flow generation of the company. We think its balance sheet is reasonable given the quality and consistency of the business.
Overall, Brown-Forman’s dividend looks extremely safe. The company maintains relatively low payout ratios, sells non-discretionary products, generates excellent free cash flow, and maintains a wonderful portfolio of brands.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Brown-Forman’s Dividend Growth Score of 87 suggests that the company’s dividend growth potential is better than 87% of all other dividend-paying stocks in the market. The company has increased its dividend for over 30 straight years and is a member of the S&P Dividend Aristocrat Index.
As seen below, Brown-Forman has grown its dividend by about 10% per year over each of the last 3-, 5-, and 10-year periods. Looking even further back, Brown-Forman has grown its dividend at an 8% annual rate over the last 30 years. Talk about consistency!
With relatively low payout ratios and booming demand for its Jack Daniel’s whiskey, the company’s long-term dividend growth prospects appear solid. We expect Brown-Forman to continue growing its dividend at a high-single digit rate for at least the next few years.
Brown-Forman’s stock trades at roughly 28 times forward earnings estimates and has a dividend yield of 1.4%, which is approximately in line with its five-year average dividend yield of 1.44%.
These types of businesses rarely appear cheap due to their strong brand value, stable revenue growth, and global opportunity for expansion. We believe Brown-Forman is also rich in price today because it is one of the few large bourbon players left in the market.
According to DealBook, Jim Beam was acquired in early 2014 for a price tag of $13.6 billion. Usually when mergers and acquisitions take place in an industry, the valuations of all companies in the space are lifted on speculation that more consolidation activity could be in the works.
While we believe Brown-Forman will continue generating high-single digit earnings growth, representing total annual total return potential of 8-10%, we can’t get ourselves to pull the trigger at 28x earnings.
The strong rise in demand for bourbon and increased M&A speculation in recent years have certainly caused the market to raise its expectations for Brown-Forman.
Brown-Forman is an excellent business with a long runway for growth as it expands its product lines into adjacent categories and reaches into new geographies. The Jack Daniel’s whiskey brand is one of the most iconic in the world and plays in a fast-growing market segment that will likely see only higher demand over the next decade and beyond.
We can’t get ourselves to buy the stock at its current earnings multiple, but this is one of the blue chip dividend stocks we will certainly keep on our watch list.
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