Consumer staples are often among the most popular stocks for dividend growth investors. These stocks offer products, such as tooth paste, laundry detergent, beverages and food, that are used by consumers during all portions of the economic cycle.
This gives these companies fairly reliable growth. And business stability often leads to very attractive dividend yields.
One of our favorite stocks in the consumer staples sector is Molson Coors Brewing Company (TAP).
Company Background and Recent Financial Results
Founded in 1873, Molson Coors has grown to become one of the largest brewers in the U.S. The company offers a variety of well-known brands like Coors Light, Coors Banquet, Molson Canadian and Blue Moon among others. The company also sells Miller Lite through its joint venture called MillerCoors.
Molson Coors sells its products in U.S. and key international markets, which include Canada, Europe, Asia, Latin America and Africa. The company has a current market capitalization of $11.8 billion and generated nearly $11 billion in revenues last year.
Molson Coors reported financial results for the first quarter on 5/1/2019. The company earned $0.52 per share, which was $0.06 below estimates, but an 8.3% improvement from the previous year. Revenue declined 1.2% to $2.3 billion, which was $23 million lower than expected by analysts.
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The decrease in revenue was primarily due to volume declines and unfavorable currency translation. Worldwide, brand volume decreased 4.7%. All segments posted year-over-year decreases in volumes. This drop was especially noticeable in the U.S. and Canada. Adjusting for currency, sales would have actually increased 0.6%. In constant currency, Europe was the best performing region with sales growth of 4.4%.
While volumes were an issue companywide, Molson Coors was very effective at passing along higher prices, which help offset volume declines. For example, U.S. net sales increased 3.7% despite a 3.8% decline in volumes. Revenue for Canada improved 1.9% in constant currency even as brand volumes were down 6%.
Net income improved more than 8% to $112.7 million due to positive net pricing in all of the company’s business segments and lower net interest expense. Also aiding growth in this area was a 4.5% decline in general & administrative costs.
The ability to increase income and raise prices while experiencing a significant volume decline shows the strength of Molson Coors’ brands.
Molson Coors compounded EPS at an average rate of 5.8% from 2009 through 2018. Given the declines in volumes, we have lowered our expected annual growth rate to 5% through 2024. Using our expected EPS of $4.80 per share for 2019, Molson Coors could earn $6.13 by 2024.
Unlike many companies in the consumer staples sector, Molson Coors has a rather inconsistent dividend growth track record. While the company has not cut its dividend over the last decade, it has paused its growth several times. The company paid the same dividend in 2012 and 2013 and then maintained the same dividend from 2015 to 2018.
As you can imagine, Molson Coors’ dividend growth over the short and long period has been very low. The company has increased its dividend:
- By a CAGR of 0.0% over the past three years.
- By a CAGR of 2.1% over the past five years.
- By a CAGR of 6.0% over the past 10 years.
Investors looking for dividend growth from Molson Coors would have spent much of the last decade disappointed. However, the company announced a 39% dividend increase for the upcoming dividend payment on 9/13/2019.
Compared to the company’s recent history of dividend growth, this is an incredibly large increase. Even more impressive, it is likely that Molson Coors will be able to continue to grow its dividend because of its low payout ratio.
The company should pay $1.96 in dividends per share in 2019. This represents a payout ratio of just 41% using our expected EPS for the year. This is lower than the company’s 5 and 10-year average payout ratios of 53% and 45%, respectively.
Many analysts prefer to use free cash flow to measure dividend safety.
Molson Coors expects free cash flow in a range of $1.26 billion to $1.54 billion for 2019. The company had 217 million in shares outstanding at the conclusion of the most recent quarter. If we assume that the share count remains the same, then Molson Coors will pay out $430 million in dividends this year. This means between just 28% and 34% of free cash flow will be consumed by dividends.
Molson Coors’ dividend looks very safe while also allowing the company additional room to continue raising its payments to shareholders.
Using expected dividends per share for the year and the recent closing price of $55, Molson Coors offers a 3.6% dividend yield today. This is nearly twice the average yield of the S&P 500.
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Valuation and Total Expected Returns
Using the recent share price and our expected EPS for the year, Molson Coors trades with a P/E ratio of 11.5. The stock has an average P/E of 20 over the last 10 years, but this includes several years where EPS fell and the share price remained stable. We have a 2024 target P/E of 15x earnings.
If the stock were to trade at this P/E by 2024, then valuation could be a 5.5% tailwind to total annual returns over this period of time.
Total annual returns would include:
- 5% EPS growth.
- 6% dividend yield.
- 5% multiple expansion.
Combined, we expect shares of Molson Coors to return 14.1% annually through 2024. Using our EPS estimate for 2024 and target P/E, we have a five-year price target of $92.
Molson Coors’ first quarter showed some weaknesses in the business. Brand volumes were down across the board and currency exchange also prevented revenues from growing year-over-year. Still, the company was able to improve net income through price increases and lower costs.
While the company hasn’t been very consistent about growing its dividend over the last decade, Molson Coors did give shareholders a very large increase recently. Including this increase, the company’s payout ratio is very low.
Stocks with the potential to return at least 10% annually over the next five years receive a buy recommendation from Sure Dividend. Therefore, we encourage investors looking for exposure to the consumer staples sector consider purchasing shares of Molson Coors.