Budweiser’s Excruciating $100 Billion Hangover

(Bloomberg Opinion) -- Anheuser-Busch InBev NV has cut its dividend. That will naturally have investors looking to drown their sorrows, but it was the right thing to do nonetheless.

The world's biggest brewer said on Thursday that it would re-base its payout to 1.80 euros per share, this year, a mighty cut from the 3.60 euros in 2017. It had little choice. Before the reduction, analysts at Bernstein had forecast that net debt at the end of this year would be 4.6 times Ebitda. That's way above the three times at which investors start to get jittery. AB InBev's own goal is to bring net debt down to about twice annual earnings.

The big question is whether it's gone far enough. Finance director Felipe Dutra says halving the dividend will save about $4 billion a year, all of which will be used to cut borrowings.

Read more: AB InBev Plunges as Brewer Cuts Dividend Payout in Half

The revised payout will be covered more comfortably by earnings. But it will make only a modest dent in the net debt, which was an eye-watering $108.8 billion at June 30 — a legacy of its 2016 purchase of SABMiller. AB InBev's borrowings are typically higher in the middle of the year because cash flow is stronger in the second half. Even so, more financial firepower might be needed to make a big difference. Analysts at Jefferies estimate that net debt to Ebitda will still be 3.8 times in 2020

And there are no signs of trading in the beer business improving. Third-quarter revenue and Ebitda missed the consensus of analyst expectations, as the company suffered from adverse currency effects in Brazil, Argentina and South Africa. There were higher commodity costs too, for example in aluminium. Meanwhile, the company is battling still to revive sales of its mid-market beer brands in U.S., as drinkers turn to premium and local alternatives. That could lead to earnings forecasts being trimmed, too.

Dutra says the brewer has steered a middle course between a chunkier reduction in the dividend and maintaining a payout to investors. That, of course, includes its two big shareholders: Tobacco giant Altria Group Inc. and Columbia's Santo Domingo family, for whom the dividend is a vital source of cash. There's also no impending liquidity crunch

No company likes to cut its dividend. But investors and analysts were braced for it. Even so, the performance of the business made it a bitter brew to swallow. The shares fell as much as 11 percent in early trading on Thursday.

If they have to cut again, you'd have to seriously question the wisdom of the $100 billion creation of “megabrew” with the purchase of SABMiller.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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