Is This Beverage Titan Paying 6.17% at Rock Bottom?

Ambev is a monster $32.9 billion company with an extensive portfolio of beer, soft drinks, and beverages. Although it has a significant market presence in Latin America, particularly in Brazil, Argentina, and Mexico, it may be best known for operating as part of Anheuser-Busch InBev, the world’s largest brewer.

The company owns some of the most recognizable beer brands in the world, including Skol, Brahma, and Antarctica, each of which engenders customer loyalty and permits Ambev to maintain premium pricing.

That brand advantage combined with the extensive distribution network forms a wide moat that creates high barriers to entry for potential competitors. Yet the share price has been dismal, down 25% year-to-date, but is that dip making the dividend yield more compelling and worth buying?

Key Points

• Ambev, dominates the Latin American beverage market and so has high barriers to entry for competitors.
• The share price is down 25% due to inflation, shifting consumer preferences, and backlash over marketing strategies.
• Ambev offers a low P/E ratio of 12.1x, a 6.17% dividend yield, and strong future growth prospects.

The Good, Bad and Ugly

Inflationary pressures have led to increased costs for raw materials, transportation, and labor, squeezing profit margins for AB InBev. So too have shifting consumer preferences towards craft beers, spirits, and non-alcoholic beverages eroded market share for traditional beer brands.

And to add insult to injury, the company faced backlash over marketing strategies for some of its flagship brands that led to negative consumer sentiment and even boycotts in certain regions.

In spite of those burdens weighing on the stock, the company has generally reported strong revenue growth and profit margins over the years. For instance last year, Ambev reported revenues of $15.9 billion, reflecting a year-over-year growth of 9%. The company’s EBITDA margin stood at an impressive 39%, highlighting its operational efficiency.

And so even though there are reasons to be fearful, Ambev holds a dominant market position in Latin America, with leading market shares in Brazil, Argentina, and several other countries. In Brazil, for example, Ambev controls approximately 60% of the beer market, making it the undisputed market leader.

Is It Time to Buy?

There is lots to like about Ambev now. For one, it trades at a very modest P/E of 12.1x and it’s not like net income is expected to fall in the coming years. Quite the contrary it’s expected to rise by about 8% annually over the next 5 years. Revenues are forecast to rise over the same period, albeit by a more modest 5.6% annually.

Perhaps best of all is the 6.17% dividend yield now, equivalent to $0.12 per share. The payout ratio is elevated at 82% but there is still room for comfort for new shareholders.

Plus, the company has been exploring opportunities in emerging markets outside of Latin America, including Africa and Asia, both of which offer substantial growth potential due to their expanding middle class and increasing disposable incomes.

When you put the pieces of the jigsaw puzzle together, you get a stock that has sold off based on both sentiment and legitimate inflationary concerns, but also one which has growing revenue and earnings forecasts alongside a compelling dividend yield, and room for international growth.

If you’re on the hunt for a stock that has a wide moat, solid dividend, and trading near rock bottom prices over the past few years, Ambev checks a lot of boxes.