Brown-Forman Corporation (NYSE:BF.B) has also generated a return on invested capital of at least 19% for more than a decade. Few businesses have demonstrated such strong profitability, and this is usually the sign of an economic moat. In Brown-Forman’s case, the company benefits from strong pricing power resulting from its branding.
Source: Simply Safe Dividends
Taking a look at the balance sheet, Brown-Forman’s debt load has increased recently to fund its $1 billion share repurchase plan. However, the planned divestiture of its Southern Comfort and Tuaca brands will add some cash to the business, and we have already noted the stable free cash flow generation of the company. We think its balance sheet is reasonable given the quality and consistency of the business.
Source: Simply Safe Dividends
Overall, Brown-Forman’s dividend looks extremely safe. The company maintains relatively low payout ratios, sells non-discretionary products, generates excellent free cash flow, and maintains a wonderful portfolio of brands.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Brown-Forman’s Dividend Growth Score of 87 suggests that the company’s dividend growth potential is better than 87% of all other dividend-paying stocks in the market. The company has increased its dividend for over 30 straight years and is a member of the S&P Dividend Aristocrat Index.
As seen below, Brown-Forman has grown its dividend by about 10% per year over each of the last 3-, 5-, and 10-year periods. Looking even further back, Brown-Forman has grown its dividend at an 8% annual rate over the last 30 years. Talk about consistency!
Source: Simply Safe Dividends
With relatively low payout ratios and booming demand for its Jack Daniel’s whiskey, the company’s long-term dividend growth prospects appear solid. We expect Brown-Forman to continue growing its dividend at a high-single digit rate for at least the next few years.
Valuation
Brown-Forman’s stock trades at roughly 28 times forward earnings estimates and has a dividend yield of 1.4%, which is approximately in line with its five-year average dividend yield of 1.44%.
These types of businesses rarely appear cheap due to their strong brand value, stable revenue growth, and global opportunity for expansion. We believe Brown-Forman is also rich in price today because it is one of the few large bourbon players left in the market.
According to DealBook, Jim Beam was acquired in early 2014 for a price tag of $13.6 billion. Usually when mergers and acquisitions take place in an industry, the valuations of all companies in the space are lifted on speculation that more consolidation activity could be in the works.
While we believe Brown-Forman will continue generating high-single digit earnings growth, representing total annual total return potential of 8-10%, we can’t get ourselves to pull the trigger at 28x earnings.
The strong rise in demand for bourbon and increased M&A speculation in recent years have certainly caused the market to raise its expectations for Brown-Forman.
Conclusion
Brown-Forman Corporation (NYSE:BF.B) is an excellent business with a long runway for growth as it expands its product lines into adjacent categories and reaches into new geographies. The Jack Daniel’s whiskey brand is one of the most iconic in the world and plays in a fast-growing market segment that will likely see only higher demand over the next decade and beyond.
We can’t get ourselves to buy the stock at its current earnings multiple, but this is one of the blue chip dividend stocks we will certainly keep on our watch list.
Disclosure: None
