AB InBev May Raise Dividends If Free Cash Flow Persists

Corona beer. Source: Flickr Image.

AB InBev or Anheuser-Busch InBev is a dividend-paying stock and has been paying cash dividends since 2006 according to its website.

While AB InBev has been paying dividends consecutively for 15 years, its dividend payout has declined considerably in recent years after topping out in 2017.

In this article, we are going to look at a couple of AB InBev’s dividend metrics, including the payment history, dividend rates, dividend yield, payout ratios, cash paid on dividend, etc.

Aside from these metrics, we will also dig into AB InBev’s financials to find out the reason that AB InBev cut its cash dividends starting in FY2017.

Keep in mind that AB InBev’s stocks are traded in several stock exchanges, including the New York Stock Exchange (NYSE:BUD), Mexican Stock Exchange (MEXBOL:ANB), and Johannesburg Stock Exchange (JSE:ANH), in addition to its main listing on Euronext Brussels (Euronext: ABI).

For AB InBev’s stock listed on the NYSE, the stock is a form of ADR or American Depository Receipt.

According to AB InBev, 1 ADR equals 1 common stock.

Therefore, U.S. investors who have bought AB Inbev’s ADR listed on NYSE (NYSE:BUD), are entitled to the same dividends declared per common stock.

However, U.S. investors will receive the cash dividends in USD instead of in Euro.

Let’s move on!

AB InBev’s Dividend Payment History

AB InBev’s dividend history

Let’s first look at AB InBev’s dividend payment history dated back to FY2016 as shown in the snapshot above.

AB InBev’s cash dividends in both the Euro and USD are shown in the table above.

AB InBev pays its cash dividend on a bi-annual basis.

AB InBev’s latest dividend payment was approved during the April 28th AGM meeting and was paid out on May 6th, 2021.

For your information, the latest dividend payout in May 2021 was for the FY2020 final period.

AB InBev’s stockholders holding the company’s common stocks right up to the ex-coupon date of May 4th, 2021, would have already received the dividend payments.

While AB InBev has been able to continue paying dividends, the payouts have declined considerably since FY2017.

Particularly, AB InBev has cut its dividends in FY2020 to only $0.50 Euro per share or $0.60 USD per share.

That said, AB InBev has suspended the FY2020 interim dividend but has reinstated the dividend for the FY2020 final period which was paid out on May 6th, 2021, making the final payout for FY2020 totaling $0.50 Euro or $0.60 USD per share.

AB InBev’s Dividend Declared Per Share

AB InBev’s dividend per share declared (Euro)

The chart above shows AB InBev’s trailing 12-month or TTM dividend per share declared in Euro.

Keep in mind that the TTM dividends shown are based on the date the dividends were approved or declared by AB InBev’s board of directors and the dividend may or may not be paid out in the same period.

According to the chart, AB InBev’s TTM dividends per share have been declining after reaching its peak at $3.60 in 2018 Q2.

As of 2Q 2021, AB InBev’s dividend totaled only $0.50 Euro per share on a TTM basis, the lowest dividend the company has ever paid in the last 6 years.

AB InBev continued to pay out a dividend even during the height of the COVID-19 pandemic throughout 2020.

Unlike most companies that have totally suspended their dividend payments, AB InBev has reinstated the cash dividend for FY2020, albeit at a small amount.

AB InBev’s Dividend Yield

AB InBev’s dividend yield

From a yield perspective, AB InBev’s dividend yield has been on a decline since 2016, reaching only 1% as of May 2021.

Back in 2017, AB InBev’s dividend rate used to yield as much as 4% and even reached 5.5% at some time in 2018.

Although AB InBev has significantly cut down on its dividend rate in 2020, the yield still jumped to 5% in mid-2020.

AB InBev’s high dividend yield at that time was primarily driven by the falling stock prices which reached around $35 Euro in mid-2020.

As of May 2021, AB InBev’s dividend yield reached only 1% on the back of a $0.50 dividend rate as well as a stock price that has recovered to $62 Euro.

AB InBev’s Cash For Dividend Declared

AB InBev’s cash outflow for dividend declared

The chart above shows the amount of cash expected to be paid out for the respective AB InBev’s dividend per share declared shown earlier.

The formula for calculating the amount of expected cash outflow is shown below:

Expected Cash Outflow = Dividend Per Share Declared X Number Of Outstanding Stocks

AB Inbev’s number of outstanding stocks used in the formula above is net of the company’s treasury stocks.

Also, the expected cash outflow for dividends declared may or may not have been paid out in the same period as the dividend declaration period.

All told, AB InBev’s expected cash outflow for dividends declared has been dwindling after topping out in 2Q 2018 at $8 billion on a TTM basis.

Prior to 2018, AB InBev dished out cash totaling more than $7 billion on a TTM basis just to pay dividends alone.

Post-2018, AB InBev’s expected cash outflow for dividends has been on a decline and reached a little more than $1 billion as of 4Q 2020.

The dwindling cash outflow is expected since AB InBev has been cutting its dividend per share declared since 2018, down from $3.60 to only $0.50 Euro per share.

As AB InBev had suspended its FY2020 interim dividend in 4Q 2020, the expected cash outflow totaled only $1.1 billion in the same quarter.

AB InBev’s Cash Paid On Dividends

AB InBev’s cash paid on dividends

In terms of total cash paid on dividends, AB InBev’s net cash paid on dividends, to both stockholders and non-controlling interest, experienced a similar trend where it topped out at nearly $10 billion in 2Q 2018 and started to decline considerably since then.

As of 2020 Q4, AB InBev’s total cash paid on dividends totaled only $1.8 billion on a TTM basis, the lowest level the company has ever reported in the last 6 years.

For your information, AB InBev has suspended the FY2020 interim dividend in 4Q 2020, and hence, the low cash paid on dividends.

Again, AB InBev’s declining cash paid on dividends is in line with the same trend seen in the dwindling dividend per share declined.

AB InBev’s Dividends To Net Earnings Payout Ratio

AB InBev’s dividend to net earnings payout ratio

To find out whether AB InBev can afford such a generous dividend payout, we look at the company’s dividends to net earnings payout ratio which is shown in the chart above.

Prior to the dividend cut which started in 4Q 2018, AB InBev’s dividend-to-net-earnings payout ratios indicate that the company’s dividend payments had gone beyond what the company could afford.

According to the chart above, AB InBev’s dividends to net earnings payout ratio was seen reaching more than 100% between FY2016 and FY2018.

In other words, AB InBev was paying a dividend that has exceeded the company’s net profit or net income prior to the dividend cut.

Even after the dividend cut which started in 4Q 2018, AB InBev’s dividend-to-earnings payout ratio still exceeded the 100% threshold, indicating that the company’s weak earnings could barely afford to pay a dividend.

AB InBev’s dividends to net earnings payout ratios were seen dropping considerably when the company significantly cut its dividends in subsequent quarters.

However, AB InBev’s dividends to net earnings payout ratio rose again to more than 200% in 2Q 2020.

This was the time when AB InBev experienced one of the worst disruptions to its businesses around the world, driven mainly by the COVID-19 pandemic.

The pandemic has caused AB InBev’s profit to dive considerably, and the company could barely afford a dividend at this time, thereby leading to the FY2020 interim dividend suspension in 4Q 2020.

However, AB InBev resumed paying a dividend again for the FY2020 final in the 1st half of 2021, May 6th to be exact.

AB InBev’s Dividends To Core Earnings Payout Ratio

AB InBev’s dividend to core earnings payout ratio

How does the payout ratio look when we measure AB InBev’s dividends with respect to its core earnings?

For your information, AB InBev’s core earnings are earnings that the company measures by excluding non-recurring items, including income and expenses that do not occur regularly as part of the normal activities of the company.

According to the chart above, after non-recurring items are excluded during the measurement, AB InBev’s payout ratios are lower compared to the previous one where none of the incomes and expenses is excluded.

Despite excluding non-recurring items, AB InBev’s dividends to earnings payout ratios were still hovering near the 100% threshold prior to 2018, the year when the company started to reduce its dividend rates.

As seen from the results, AB InBev could barely afford a dividend even with non-recurring incomes and expenses excluded when measuring its profits.

In other words, AB InBev has to cut its dividends considering that the core profits could barely cover the cash dividend payouts.

Therefore, AB InBev has reduced its dividend payouts due to diminishing core profits or excessive dividend payouts.

After reducing the dividend rates, AB InBev’s payout ratio dropped considerably in subsequent years and reached only 22% as of 4Q 2020, a level that the company should feel comfortable around.

Keep in mind that AB InBev’s FY2020 interim dividend was suspended and hence, the low payout ratio in 4Q 2020.

However, AB InBev has reinstated the dividend for the FY2020 final in May 2021.

The financial data for May 2021 is still not out yet and is pending AB InBev’s earnings release that will take place in July 2021.

AB InBev’s core earnings payout ratio may come to about 50% in FY2021 if the company pays out the interim and final dividend for FY2021.

At a 50% payout ratio, I believe this is a number that AB InBev will be comfortable around.

AB InBev may even raise the dividends if core earnings further improve in FY2021 and FY2022.

AB InBev’s Dividends To Free Cash Flow Payout Ratio

AB InBev’s dividend to free cash flow payout ratio

A discussion of AB InBev’s dividend will be incomplete without including cash flow, free cash flow in particular.

Therefore, a payout ratio that depicts cash paid on dividends to free cash flow is created as shown in the chart above.

According to the chart, AB InBev’s dividends to free cash flow payout ratio sees nearly the same trend as the earnings payout ratio.

Prior to 2018, AB InBev’s cash paid on dividends has considerably exceeded its free cash flow as seen from the 100%+ ratio, prompting the company to reduce its dividends subsequently.

At a free cash flow payout ratio exceeding 100%, AB Inbev’s generated free cash flow was insufficient to cover the cash dividend payments.

In this aspect, AB InBev may have used its cash reserves or cash on hand or even other means, including the sales of assets, to cover the cash outflow on dividend payments.

Although AB InBev had drastically cut down on dividend payouts post-2018, the free cash flow payout ratios were still considerably high, in FY2020 in particular.

The 80% free cash flow payout ratio seen in 2Q 2020 has prompted AB InBev to suspend the FY2020 interim dividend in 4Q 2020.

However, AB InBev reinstated the dividend for the FY2020 final as of May 2021.

Can AB InBev Afford To Raise Dividend To Its Prior Highs?

AB InBev’s free cash flow

To find out whether AB InBev can afford to raise its dividends to their prior highs, we can look at the company’s expected cash outflow on dividends declared.

For example, if AB InBev wanted to declare a cash dividend that amounts to $3.60 Euro or about $4.40 USD per share on an annual basis, that equals $9 billion of expected cash outflow based on 2 billion common stock outstanding.

However, AB InBev has only managed to generate about $7 billion of free cash flow as of 2020 Q4 after taking into account the company’s capital expenditures.

Therefore, AB InBev will not be able to afford such a generous dividend payout considering that the amount of cash outflow for dividends is more than the amount of free cash flow.

Assuming that AB InBev’s positive free cash flow persists at the current level and it can tolerate a free cash flow payout ratio of up to 60%, AB InBev may be able to pay out as much as $2.00 USD or $1.64 Euro per share in cash dividend on an annual basis, a 260% higher than the current dividend rate of $0.50 Euro per share.

Also, AB InBev’s free cash flow has improved significantly in 2020 Q4 compared to 2020 Q2, a 50% jump in this case.

The improvement in free cash flow in 4Q 2020 may have prompted AB InBev to approve the dividends for the FY2020 final during the AGM in April 2021.

Therefore, if AB InBev’s free cash flow can stay at this level going forward or even rises, there is a high possibility that the company will raise the dividend rates for FY2021 interim and FY2021 final.

Conclusion

AB InBev’s cash dividends have been dwindling and reached only $0.50 Euro or $0.58 USD for FY2020.

AB InBev’s declining dividends have to do with the company’s diminishing profits as well as the lower free cash flow.

AB InBev has to cut its dividends considering that the earnings and free cash flow payout ratio reaching more than 100% prior to 2018 and was still considerably high in FY2020, leading to the total suspension of the FY2020 interim dividend.

After significantly cutting its dividend rates, AB InBev’s earnings and free cash flow payout ratios have dropped to a level that has never been seen in the last 6 years.

The good news is that AB InBev’s free cash flow has improved by as much as 50% in 4Q 2020 compared to 2Q 2020, an improvement that has led to the reinstatement of the FY2020 final dividend.

If AB InBev can maintain its core profits and free cash flow at the current level or even improve them in FY2021 and FY2022, the company will most likely raise its dividend rate in the future.

References and Credits

1. All financial figures in this article were obtained and referenced from AB InBev’s annual and bi-annual filings available in AB InBev Bi-Annual and Annual Reports.

2. Featured images in this article are used under creative commons license and sourced from the following websites: Traveller_40 and renata mascarello.

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