We recently sold Alcon (ALC) and Anheuser-Busch InBev (BUD) in all client accounts last week. We used the proceeds from the Anheuser-Busch InBev trade to start a position in Costco (COST).*
Some accounts may still own a small position in Anheuser-Busch InBev. We bought more Anheuser-Busch in some accounts at the end of 2018 at a lower price. That trade currently has short-term capital gains associated with it in taxable accounts. We try to be as tax efficient as possible and we don’t want to take short-term capital gains when we can avoid them.
We will talk more about Costco in an upcoming Dividend letter. We’ll use this update to discuss why we sold Alcon and Anheuser-Busch Inbev.
Alcon was a recent spin-off from Novartis. It pays a dividend and there is value in the spin-off but we did not want to make it a full position.
The AMM Dividend Growth Strategy is a concentrated portfolio. Our target is typically 25-30 positions each with a portfolio target weight of 3.5%. Given Alcon’s low portfolio weight following the spin-off, and the likelihood that we will add other dividend growth stocks that we view more favorably, we decided to sell Alcon.
Anheuser-Busch InBev (BUD)
Investment firm 3G Capital perfected the strategy of buying established companies, cutting costs with zero-based budgeting, increasing operational efficiency, increasing margins, and increasing returns on equity and invested capital. 3G tended to focus on well-known large consumer branded companies like Heinz Co., Kraft Foods, and Anheuser-Busch InBev.
These were mature low-growth companies (3-5%), with bloated cost structures. 3G generated large investment returns by buying these companies, cutting costs, and improving operations. Then they would repeat the process by merging another consumer branded product business into the company.
They followed this playbook for Anheuser-Busch InBev. 3G started with the Brazilian brewer Ambev. They turned its operations around. Then they merged AmBev with Interbrew to form InBev. They cut costs and improved operational efficiency. Then InBev bought Anheuser-Busch to form Anheuser-Busch InBev. The old Anheuser-Busch had a very bloated cost structure. Then Anheuser-Busch InBev finally bought SAB-Miller as many within the industry predicted.
What 3G did not account for was a shift in consumer tastes. Consumers are moving away from traditional branded goods towards niche products and “better for you” food options.
Beer consumption in the U.S. accounts for ~30% of Anheuser-Busch’s revenue and profits. US consumers are drinking less alcohol in general, and the trend in alcohol consumption has been shifting from beer to spirits. The big beer brands in the U.S. are also losing share to craft beer. Craft beer consumption continues to grow even though overall beer sales are declining.
The other concern is the purchase of SAB Miller. Anheuser-Busch InBev took on debt to fund the merger. Unlike previous acquisition, SAB Miller knew that Anheuser-Busch InBev wanted to buy them years in advance. SAB-Miller went on its own cost cutting programs to improve their operations. The goal was to induce a higher purchase price. Anheuser-Busch InBev paid the premium. Now management has less opportunity to eliminate costs and improve operational efficiency and generate the returns they need to justify the purchase price.
Anheuser-Busch InBev needs to deleverage its balance sheet. With fewer bloated costs to eliminate and declining sales in a major market, Anheuser-Busch InBev cut its dividend. Capital previously going out as a dividend will be used to pay down its debt.
In our original write-up about Anheuser-Busch InBev, we said this might happen. This is what management did after purchasing Anheuser-Busch. After aggressively deleveraging their balance sheet they reinstated, and subsequently grew the dividend.
Given the larger debt load, less opportunity to cut costs, and shifting consumer tastes, we think it will take longer this time to grow their dividend again.
We’ll keep an eye on Anheuser-Busch InBev and may reinvest in the company in the future. Right now we saw an opportunity to invest in Costco (COST) and we used the proceeds from the Anheuser-Busch InBev sale to fund the Costco purchase.
If you would like to learn more about the AMM Dividend Growth Strategy and what AMM can do for you please schedule a time to talk below.