AB InBev

Every 3rd beer comes from AB InBev

Germany is the land of beer. We've been brewing our beer according to the Purity Law for over 500 years. Apart from the wine festivals, there's hardly a folk festival that gets by without beer. As long as you don't overdo it, a cold beer is a delicious treat - I'm just thinking of all the beautiful beer gardens here around Munich. And yet beer consumption is declining in this country. But not worldwide - especially in emerging regions, consumption is currently picking up strongly. Africa, Asia and Latin America are seen as the growth drivers of the coming years.

Naturally, breweries that can supply these regions benefit from this. One group that boasts a huge brewery network is AB InBev. It was already the absolute number 1 before the acquisition of SABMiller, but now the combined company holds over 30% of the entire beer business worldwide. This merger cost a pretty penny, though (more than 100 billion US dollars, to be exact), and that's currently reflected in the stock chart as well. Was the acquisition worth it, or should they perhaps have passed on it?

The history and business model of AB InBev NV

Various kinds of beer can be found throughout human history. The first brew supposedly existed around 13,000 years ago. In China there's an old beer recipe that was written down more than 5,000 years ago. And the Egyptians and the Celts brewed their own beers too. Beer was considerably developed and refined in the Middle Ages. Drinking water was often of miserable quality, which is why people even gave their children the germ-free, boiled brew. And because of its high calorie content, monks liked to drink it during Lent. That's how the first monastery breweries came about.

Even when conquering the new continent of America, people didn't want to go without a cold beer. At first the thirst quencher was shipped over, but later local breweries established themselves. Recipes were continually refined over the years and brewing knowledge was passed on. Then in 1888, the Swiss immigrant Joseph Villiger founded Cervejaria Brahma in Brazil. Exactly 101 years later, Jorge Paulo Lemann, together with his investment bank Banco Garantia, took over the Brahma brewery for around 60 million US dollars.

Since in this industry customers often buy what they know and quite often stay loyal to one brand their whole lives, Lemann had only two ways to gain a foothold in new markets - mergers and acquisitions. And so in 1999 the businessman merged the Brahma brewery with its local rival, the Companhia Antarctica brewery, thereby founding the American Beverage Company, AmBev for short.

In Belgium, too, several breweries joined forces to be able to do more lucrative business. Among others, the traditional brand Stella Artois, founded back in 1366, became part of the international brewing group Interbrew in 1988. Later, in 2001, the group also took over the Bremen-based Beck's brewery. Just 3 years later came the big merger of Interbrew and AmBev. The world's largest brewing company, InBev, was born.

But that wasn't the end of it - in 2008 the beer group bought the Budweiser company Anheuser-Busch for a hefty 52 billion US dollars. AB InBev's market share of 21% was already enormous, but they still weren't satisfied. So in 2016 they simply took over SABMiller as well, becoming the dominant leader of the entire beer industry. At more than 100 billion US dollars, though, the purchase wasn't exactly a bargain.

What's next for AB InBev?

Even though the SABMiller acquisition was pretty costly, it certainly wasn't a wrong decision. But as you can see from the share price, the group hasn't exactly had an easy time since then. It's still sitting on a relatively high mountain of debt that needs to be paid down. The board has already made some cost cuts - for example, the dividend was cut by 50%. But it's not just shareholders who have to accept losses: managers no longer get their own offices, and brewery employees had their free beer taken away. In addition, they want to sell part of their Asia division. This way the group is trying to bring around 7 billion dollars into its coffers, although nothing is set in stone on that front yet.

Apart from the debt, AB InBev also wants to reduce its CO₂ emissions. To that end, it has committed to various sustainability goals it wants to reach by 2025. Furthermore, it wants to increasingly move beer transports onto inland waterway vessels in the future. Already in 2019 the company is trying to save 5,000 truck trips this way. From 2020 on, it's supposed to be as many as 10,000 truck trips per year. Drivers and the environment will be grateful.

The cannabis hype has meanwhile arrived in the beverage industry too. Together with the Canadian cannabis producer Tilray, the beer giant is currently researching a non-alcoholic marijuana drink. When something along those lines will be released, however, is still anyone's guess.

What's next for the dividend?

Well, a dividend cut is never nice. And 50% is pretty harsh - imagine your salary being cut in half overnight?! But I think the board acted correctly in this situation. At currently 2.4%, the dividend yield is still very good. The payout ratio is now only about 40% (over 80% before the dividend cut), which puts it at a completely relaxed level.

Conclusion:
I think AB InBev is an impressive company. How it managed to grow so enormously in such a short time and secure such a huge market share is definitely remarkable. The group is still paying down its debt for now, but the day of breaking even is getting closer and closer. Then of course the dividend will pick up again, although by that point the stock probably won't be available at a bargain price anymore.