Anheuser-Busch (NYSE:BUD) recently slipped in a very big promise for the shareholders. Subject to a vote at the upcoming annual shareholders meeting the dividend will be substantially increased. Felipe Dutra – CFO ended the last conference call with this little tidbit. Well of course the shareholders are going to reward themselves. This is like raw meat in front of a shark.
Readers should note the prepared remarks on the conference call all revolved around the market share and product margins the company is enjoying. Felipe Dutra almost looked like a last-minute act added on after the program had been printed. Increasing the dividend is laudable but the financial factors are formidable.
This company is hugely leveraged. Approximately one-third of its market cap is debt. Admittedly the cash flow driven by growing margins and increasing market share is growing nicely. But the maturities are monumental. An approximate $35 Billion level of indebtedness will not disappear over night. Starting to engage shareholders and creating expectations of increasing dividends may be pre-mature. If consumption of beer hiccups for whatever reason the Anheuser-Busch could not borrow to maintain the dividend.
Debt holders would most certainly look at decreasing or eliminating the dividend as a way to protect interest and principal payments which are contractual obligations. Any stutter on the dividend front would cause dividend investors to lose confidence for extended periods of time. Felipe Dutra did not elaborate other than saying cash flow is improving so now we want to pay attention to dividends.
Cash flow looks good when you have bet on every number on the roulette wheel. All the major growing countries have significant marketing investments. Anyone familiar with portfolio theory will understand there will be surprises and disappointments. You just do not know where they will be.
So investors have a quandary. If you are dividend oriented do you buy now and experience increasing dividends at the risk of market failures? The entry point will develop if as and when you see Anheuser-Busch accelerating debt repayment in any number of ways. Management will want to convert principal and interest payments into dividends as quickly as possible, If we truly have a cash flow rising situation they will accelerate debt repayment and enhance the cash flow increase while building cushion in the EBITDA.
Some say the debt market never gets it wrong. With about $35 billion in debt they are the canary in the mineshaft.
George Gutowski writes from a caveat emptor perspective.
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