Brown-Forman

Family-owned since 1870

As the saying goes: "People will always drink, especially in times of crisis!" Generally speaking, that's true, of course, and a spirits maker's business stays stable even during a recession. But it's also a fact that a lot of bars are closed right now and countless celebrations have been canceled or postponed. And at home, people probably tend to drink beer and wine rather than hard liquor.

Nevertheless, today I want to take a look at Brown-Forman. The Dividend Aristocrat headquartered in Louisville (Kentucky) is known worldwide for its whiskey. But vodka, liqueur and wine lovers won't come up short here either. Brown-Forman is also a true survivor that even managed to do business during Prohibition. How the Jack Daniel's company pulled that off and how I see its future prospects, you'll find out in the following article.

The history and business model of Brown–Forman Corp.

The story of Brown-Forman has its origins in 1846, when George Garvin Brown was born in Munfordville. Since both his father and his older brother fought in the American Civil War, he was the man of the house from an early age. His family sent him to relatives in Louisville to attend high school there. But shortly before graduating, he had to drop out to help out at home. Soon after, George got a job as a pharmaceutical salesman at Henry Chambers & Company. Besides a few medicines, he also sold opiates and medicinal whiskey to doctors' offices and pharmacies. At the time, whiskey was one of the most important sedatives. However, there were no established quality standards, so it was not unusual for foreign substances to be mixed into the whiskey barrels to stretch the supply. Brown quickly noticed customers complaining about the miserable quality of the whiskey.

In 1870, George decided to open his own spirits company, J.T.S. Brown & Bro., together with his half-brother John Thompson Street. In the beginning, the two bought their whiskey directly from a distillery and filled it into clear bottles, which they corked and sealed. They also labeled the bottles by hand and warned taverns against buying bourbon bottles with a broken seal. This effort quickly paid off, and Brown's whiskey called Old Forester became known for its first-class quality. It was named after his friend, the physician Dr. William Forrester - but to avoid confusion, they dropped one "r" from the name. When his half-brother decided to go his own way a few years later, Brown brought his friend and later accountant George Forman into the company. After several changes of partners, Brown, Forman & Company was born in 1890.

When Forman died in 1901, Brown became the sole owner and wanted to broaden the business. At that point, he sourced his whiskey as a wholesaler from several Kentucky distilleries. A year later, he acquired the Ben Mattingly distillery and shortly afterwards invested around 70,000 dollars (roughly equivalent to 2 million dollars today) in expanding the facility. Now that he had enough whiskey available, he gradually expanded his brand portfolio. Soon, however, a new worry began to torment him: Prohibition. He fought the alcohol ban with everything he had and even published a book compiling Bible verses about wine and other alcoholic beverages. Since he died in January 1917, he didn't live to see his worst fear come true. Fortunately, his son Owsley managed to secure one of only six government licenses, which allowed them to store whiskey and sell it by medical prescription.

In 1923, with Prohibition in full swing, Brown-Forman seized the opportunity and bought the Early Times distillery from John Henry "Jack" Beam (Jim Beam's uncle). After the era of alcohol abstinence was officially declared over in 1933, the company took off again at full speed. In 1956 came the acquisition of the Jack Daniel's distillery in Tennessee, which marked an important milestone. The company kept expanding its portfolio, so that today Brown-Forman is one of the largest and most successful distillers in the world.

Can Brown-Forman keep convincing in the future?

First, I'd like to take a look at the numbers from the most recently published quarter (Q1 2021). Here you really have to admit that Brown-Forman truly delivered despite the current coronavirus crisis. Net sales rose to 753 million US dollars, an increase of 3 percent. On an adjusted basis, sales did decline by 2 percent, but in my opinion that's perfectly manageable given the current situation. Brown-Forman's brand portfolio currently includes around 25 spirits, with whiskey, Scotch, tequila, vodka, wine and gin. By far the biggest revenue driver is the Jack Daniel's whiskey brand.

One area that is moving more and more into the foreground at Brown-Forman is premium quality. Its high-end whiskey brands Woodford Reserve and Old Forester in particular have been posting remarkable growth for several years. But the fine Mexican tequila Herradura is also increasingly in demand. In general, demand for premium spirits has risen enormously in recent years - more and more people appreciate and enjoy the fine stuff.

True to the motto "less is more," the company recently parted ways with three of its brands. The sale of Early Times, Canadian Mist and Collingwood to Sazerac closed on July 31. Letting go of brands that haven't been performing as hoped for a while is totally sensible. This way Brown-Forman got rid of its problem children and can now focus fully on its revenue drivers again and keep building them out.

The company has now been family-owned for over 150 years. To this day, the Brown family holds the majority of the company's shares. Family businesses often think much more long term and frequently plan for future generations rather than the next quarterly results. Of course, that's no guarantee that every family business always does great - it's just one of many points that I, as a private investor, really like. It's also worth mentioning here that the company has both A and B shares. If you buy A shares, you get voting rights, and if you buy B shares, you give them up.

What about the dividend?

The spirits maker Brown-Forman has been paying a dividend to its shareholders since 1945. Since 1984, the company has also managed to increase its payout year after year. At 5.8 percent, the annual dividend growth rate over the last 10 years isn't particularly high, but it's still solid. The dividend yield is 0.9 percent, which is surely also due to the excellent performance of the share price. With a payout ratio of 34.8 percent, the Dividend Aristocrat also leaves enough capital in the company to keep growing on its own. Just like with Costco last week, Brown-Forman investors can look forward to special dividends every now and then.

Conclusion:
Brown-Forman is without a doubt one of the most successful spirits makers in the world today. Over its history, it has already proven that even difficult and long dry spells can hardly hurt the company. Its broad positioning and strong premium brands ensure solid sales. Long-term investors will surely be happy here.