World: AB InBev decides to cut dividend on weak Q3 profits

The world’s largest brewer Anheuser-Busch InBev has cut its dividend in half and reported weak third-quarter profits hit by slower sales in key markets including Brazil, the US and South Africa, the Financial Times reported on October 25.

Shares in the maker of Budweiser shed as much as 11 per cent on October 25, their sharpest fall in a decade. While the company cast the dividend cut as needed to pay down its $108 bln in debt from the 2016 SABMiller acquisition more quickly, investors appeared more spooked by poor performance of the business.

“A 50 per cent dividend cut is not a great surprise,” wrote RBC analyst James Edwardes Jones in a note. “A significant and widespread shortfall against company compiled expectations is. This is not AB InBev’s finest hour.”

The annual dividend for fiscal year 2018 will now be €1.80 a share, the company said. It was the first cut since 2015, and the $4 bln saved will all go to paying down debt.

Felipe Dutra, chief financial officer, said the decision to lower the dividend was influenced by currency volatility in some of the group’s big markets like Brazil, South Africa, and Argentina, which have been shaken as emerging-markets assets have fallen out of favour with investors. Without action, debt repayments risked slowing since profits would be hit once translated into dollars.

“We believe it would make more sense to take measures to accelerate the deleveraging,” he said. “It will benefit both the equity and the debt holders.”

AB InBev, whose brands also include Stella Artois and Corona, also reported third-quarter revenue and earnings before interest, tax, depreciation and amortisation that fell short of analysts’ expectations.

Underlying sales growth was 4.5 per cent in the quarter to reach $13.3 bln in sales, lower than the market’s expected $13.97 bln. The profit miss was even wider. Underlying ebitda growth came in at 7.5 per cent — consensus was for 9.9 per cent — on ebitda of $5.36 bln.

Weakness stemmed largely from Latin America, where the company generates some 40 per cent of sales. In the US, consumers are drinking less beer or switching to craft brews or spirits. North America volumes fell 0.5 per cent in the quarter, and AB InBev’s brands continued to lose market share in the region.

Like other beer companies, AB InBev is also contending with higher input costs on everything from aluminium for beer cans to transport.

“A weak quarter from AB InBev operationally speaking . . . The question is whether the dividend cut will be enough to deleverage fast enough for investors,” wrote Berenberg analyst Javier González Lastra.

The company reiterated its goal of reaching a net debt-to-ebitda ratio of 2 times, and said the dividend cut would allow it to reduce leverage by half a turn each year. Its net debt-to-ebitda ratio is expected to stand at 4.6 times by the end of the year, far higher than Heineken’s 2.2 times and Carlsberg’s 2 times, according to Bloomberg data.

AB InBev’s shares had already fallen 22 per cent this year, drastically under-performing rivals Heineken and Carlsberg, which were down 10 per cent and 2 per cent respectively. Investors have been worried about the company’s high debt and emerging market exposure, and the shares have also been pressured by speculation that the dividend would be cut.

The market also wants to see proof that the backers of AB InBev, Brazil’s 3G Capital investment fund, can actually expand the businesses they take over as opposed to focusing solely on cost cuts to improve profitability. In March, the company announced a slimmed down structure aimed at spurring growth, and it has been moving into more premium categories of beer to supplement its mainstay Budweiser brand.

The shares pared some of their losses to sit 8 per cent lower at €66.65 by mid-morning.

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