Beer Stocks: Good for Income, Too?
Earlier in the day, I alerted Wall Street Daily readers to a brewing opportunity in beer stocks…
You see, Americans have finally overcome their hangover from the Great Recession. And now they’re throwing back the suds again. Case in point: Total beer shipments are up 1.9% in 2012, reversing three straight years of declines.
As a result, stocks of the world’s largest brewers are on the rise, too. They’re up an average of 18.6% so far this year.
In short, with the beer industry back in growth mode, I’m convinced growth investors should consider joining the party. But income investors shouldn’t feel left out. Not when four out of the five top brewers I profiled also pay dividends.
So today, let’s take a look at the most compelling options for dividend investors. (Hint: They’re not the same stocks I recommended for growth investors.)
TAP into Income
The difference between growth investors and income investors can be boiled down to risk. The former embraces it in hopes of earning higher returns. The latter abhors it in hopes of earning safe, reliable returns.
The end result? The investment of choice for growth investors and income investors isn’t going to be the same.
While I think Heineken (OTC: HINKY) and Anheuser-Busch InBev (NYSE: BUD) offer the most upside potential for growth investors, I think dividend investors should instead consider Molson Coors Brewing Company (NYSE: TAP).
If you read my article this morning, you might think I’m being hypocritical. In it, I criticized Molson Coors for being overly exposed to the notoriously slow growing developed markets of North America and the United Kingdom.
But, again, we’re talking about investors with different risk tolerances here. Slow and steady wins the race for dividend investors. And while Molson Coors might boast the slowest earnings growth rate, averaging 4.47% per year over the last five years, it’s also the most reliable.
Want proof? How about this: When the economy and stock market fell off the cliff in 2008, shares of Molson Coors finished the year down a scant 3.76%. In comparison, AmBev (NYSE: ABV) and SABMiller Plc. (OTC: SBMRY) fell 33.7% and 38.2%, respectively, in lockstep with the S&P 500 Index’s 37% decline.
I should point out, too, that Molson’s growth isn’t destined to languish. The company’s June acquisition of StarBev provides diversification into Central and Eastern Europe, which boasts higher growth rates. The new markets will account for a meaningful 15% of operating income right out of the gates. Undoubtedly, this contribution is going to increase over time, which, in turn, will bolster Molson’s overall profitability.
Slow and steady aren’t the only fundamentals working in Molson’s favor.
The company also sports the highest yield of any brewer. At current prices, the stock yields a respectable 2.83%.
More importantly, its yield is growing. Over the last four years, management’s hiked its dividend by an average of 19% per year.
And once Molson’s recent acquisition is integrated, I expect management to raise the dividend again. They can certainly afford it given the company’s dividend payout ratio of just 43%.
It’s worth noting that Molson is also the most attractively priced brewer. It trades at a 35% discount to the industry average price-to-earnings (P/E) ratio. On a forward-looking basis, it trades at almost a 30% discount to the average stock in the S&P 500.
Bottom line: Dividend investors can join the party in beer stocks, too. They just have to choose who to hang out with wisely. The safest choice is Molson Coors. It’s the cheapest, highest-yielding and most reliable brewer.
Ahead of the tape,