Introduction
Drinking a beer with a large pizza, drinking a beer after a long day of work, drinking a beer in the pub with your friends, drinking a beer on a hot summer day while the steak is sizzling on the grill.
Apparently these habits belong to yesteryear. A new generations of humans has decided to go beyond meat and beyond beer. At least that’s what you’d believe by listening to The Molson Coors Brewing Company’s (TAP) latest earnings call. Or should I call them the Molson Coors Beverage Company?
At the same time the company posted its 3rd quarter results, the new CEO, Gavin Hattersley revealed his “revitalization plan”.
TAP is currently trading at $53.61 and yields 4.25%. My M.A.D Assessment gives TAP a Dividend Strength score of 64 and a Stock Strength score of 79.
I believe that the turnaround will likely take same time. The stock will likely be dead money for the next two or three quarters as investors wait for more clarity concerning future growth.
However if you’re looking for a consumer staple with a good dividend yield, a cheap price, and aren’t too concerned with short term capital gains, TAP could be the stock you’re looking for.
This article will analyze TAP’s suitability as an income investment before considering its potential for capital preservation and/or capital appreciation.
Dividend Strength
I define strong dividend stocks as stocks which can provide both of the following:
Dividend safety: a well covered dividend which will survive the test of time.
Dividend potential: The combination of dividend yield and dividend growth prospects.
Both of these are sine qua non to successful dividend investing. After all there is little point in having a big dividend yield with aggressive dividend growth if the dividend is likely to be cut. Conversely there is little point in pursuing super safe dividends if their contribution to your total returns is dismal.
Dividend Safety
Molson Coors has an earnings payout ratio of 254%. This makes TAP's payout ratio better than 5% of dividend stocks.
TAP pays 21% of its operating cashflow as a dividend, which is better than 62% of dividend stocks.
TAP pays 44% of its free cashflow as a dividend, which is better than 51% of dividend stocks.
Here we have a perfect example of why I don’t content myself with looking at the stock’s earnings payout ratio. At over 200% the dividend seems unsustainable. Yet in the last twelve months, dividend payments were equal to only a fraction of operating cashflow. What caused the massive diversion between earnings and cashflows? A $703mn line item for restructuring and impairment provisions.
Is anybody curious about the timing of these impairments? I’m not. The previous CEO retired in September. On his first earnings call as CEO Gavin Hattersley announces his revitalization plan (more on that below). His performance will start to be judged from year 2020 onwards. The management team is incentivized to have a “big bath”, and clear the books of any bad assets. The share price is already down 50% from its high a few years ago, this year will likely be worse than the previous, so why not make it as bad as possible so that future performance looks good in comparison?
Some may consider these practices borderline when it comes to ethics. I simply believe it is the name of the game. If I were in his shoes, I’d want to start with a clean slate too, and would probably like the opportunity to weed out the bad assets from the balance sheet before my first full year in tenure.
Either way, this explains the decline in earnings. This doesn’t jeopardize the dividend safety whatsoever, since TAP remains a cash generating machine. The firm has enough free cashflow to pay for the dividend twice over. I doubt the dividend will be cut anytime soon.
Dividend Potential
Molson Coors has a dividend yield of 4.25% which is better than 79% of dividend stocks.
In July TAP announced a 39% dividend hike. This was the first increase since early 2015. Molson Coors’ dividend policy states that the company aims to pay 20 to 25% of the trailing year EBITDA. They are not concerned however, with growing the dividend every year.
As such we have seen the dividend remain flat for multiple years throughout the past decade.
Nonetheless the dividend has risen at a 9% CAGR during the past 5 years. This more than makes up for the bumpiness in the increases. When you consider the high dividend yield with it, you can only conclude that TAP has superior dividend potential.
So the real question for TAP is: where is EBITDA going in the next years? In 2020 it will likely be flat to slightly down, as the company continues its efforts to transition fully into its new revitalized self. The main goals of the company’s revitalization plan are:
- To invest in the firm’s iconic brands. The firm’s Coors Light Made to Chill campaign was a refreshing departure from traditional beer advertisements with beaches, celebrity spokespersons and the like. It is clearly targeted towards the younger millennial/gen Z type audience. To continue competing in the beer space, TAP will have to be effective at recruiting new (legal age) drinkers. A similar effort has been made on a different campaign for Miller Lite, redefining “Miller Time” for the younger generations.
- To grow aggressively their “above premium” brands, which already constitute 30% of the new “Europe” segment which includes Africa and Asia as well. Multiple new brands with a unique selling point like “organic ingredients”, “unique taste & lower calories” are set to launch in the US in 2020.
- To go “beyond beer”, as is communicated by the change in company name from Molson Coors Brewing Co to Molson Coors Beverage Co. Sales of hard seltzers in the US have been booming and are expected to continue growing massively for the next few years. TAP’s Harry’s brand is only a fraction of the market. The company is betting big on its upcoming brand Vizzy Hard Seltzer which management believes has “distinguishing characteristics to make it standout from the competition in which [management] believe can leapfrog the [competition].”
- To increase their marketing capabilities. To do this the firm has moved the headquarters from Denver to Chicago, in the hopes of attracting and retaining superior marketing talent.
- To streamline the company, cutting costs and increasing the speed to market and flexibility of the firm in upcoming years.
These plans always sound pretty and well presented with pretty slides, but success is obviously yet to be proven.
Nonetheless, I believe the plan to address the main woes of the company which has failed to respond to changing consumer preferences. I don’t expect another dividend increase next year, or the following year, but if the firm can catch up and compete effectively across all categories, new and old, it should be in a position to raise its dividend aggressively again by early 2022.
Dividend Summary
TAP has a dividend strength score of 64 / 100. Given how well covered the dividend is, and how high the dividend yield currently is –remember 3 years ago when the stock yielded ~1.5%--, I can only conclude that TAP looks like an appealing dividend stock. The choppy dividend growth is something you need to decide you can live with. For me, given the big swings in dividends when the increases eventually do come, I don’t mind.
Stock Strength
So TAP would seem like an interesting income stock. Seldom has the company traded at prices which would offer yields this high. But what about its potential for capital preservation? During the October 2007 to March 2009 recession, TAP lost 42% of its value. That’s better than the S&P 500, which lost 56%. But we can all agree that losing 40% instead of 50% doesn’t make for much compensation.
I don’t believe TAP will be a great performer for at least the next 6 quarters as its business undergoes large transitions. Therefore I’m more preoccupied with the extent to which the stock could hold up if a recession hits during that time-frame. I will look at four factors: value, momentum, financial strength and earnings quality to determine TAP’s performance potential relative to the market in upcoming quarters.
Value
- TAP has a P/E of 75.51x
- P/S of 0.86x
- P/CFO of 6.35x
- Dividend yield of 4.25%
- Buyback yield of 0.00%
- Shareholder yield of 4%.
According to these values, TAP is more undervalued than 82% of stocks, which is very encouraging given that this number was derived even with the firms sky high P/E, which is worse than 90% of US listed stocks. As a reminder, earnings are artificially low because of $703mn impairment costs which were incurred this quarter. If we adjust for this expense, TAP would be trading at a modest 13x earnings, significantly less than the sector’s median 23x earnings.
Relatively to cashflow and sales, TAP appears in the top quintile of US stocks. Undervalued stocks typically do better during recessions, as their already depressed values decrease less. If a bear market were to start tomorrow, I believe TAP would do considerably better than the broad market given its low valuation.
Value Score: 82 / 100
Momentum
Molson Coors trades at $53.61 and is up 2.62% these last 3 months, yet remains down -12.64% these last 6 months & -15.07% these last 12 months.
This gives it better momentum than 34% of stocks, which is worrying. Since reaching around $110 per share in October 2016, the stock has been in free-fall. Year after year, the stock price has declined, without ever finding a floor. Given the massive trend downwards, I would give very little weight to the fact that the firm is up in the last 3 months. For me to be confident that the worst is over, I’d need to see the stock consolidate at this price and remain stable for a few quarters.
I’m tempted to say the stock looks cheap at current prices, but if there is one thing I’ve learned in the markets is that cheap can get cheaper, especially when investor sentiment is against a stock.
I personally feel like the turnaround plan could work. Problem is what I “feel” doesn’t really matter. What other investors feel and think is a lot more important in maintaining the price.
This year the technical have been sending mixed signals as the stock has traded in a downward pointing corridor. The stock challenged $50 per share a couple times in August, which it merrily bounced off. I think the $50 price is a psychological barrier for many investors, and that it should serve as resistance for the stock going forward.
Obviously in a severe bear market it could go through it, but given the current market environment, I struggle to see the price go below. On the other hand, I do not expect it to perform greatly either, and expect more mixed signals coming from the moving averages in upcoming months.
Momentum score: 34 / 100
Financial Strength
TAP has a gearing ratio of 1.2, which is better than 57% of stocks. The company’s liabilities have changed by -6% over the course of the last 12 months. The company’s operating cashflow can cover 11.9% of liabilities.
This makes TAP more financially sound than 84% of U.S. listed stocks. The company has been successful at bringing debt levels down, and now is only geared 1.2 to 1. This is a better than average amount of gearing. Liabilities have continued to come down and cashflow provides decent coverage. I believe TAP remains financially strong.
Financial Strength Score: 84/100
Earnings Quality
TAP has a Total Accruals to Assets ratio of -7.4%, which is better than 48% of companies. It depreciates 138.3% of it’s capital expenditure each year, which is better than 60% of stocks. Finally each dollar of assets generates $0.5 in revenue, which is better than 47% of stocks. This makes TAP’s earnings quality better than 57% of stocks. TAP’s earnings quality is well rounded and unlikely to deteriorate in upcoming quarters.
Earnings Quality Score: 57 / 100
Stock Strength Summary
When combining the different factors of the stocks profile, we get a stock strength score of 79 / 100 which is encouraging. The stock looks cheap, and has good fundamentals to base itself on. However given how early we are in the turnaround story, it is unlikely that the stock will perform exceedingly well. The depreciated price should however offer considerable downside protection.
Conclusion
With a dividend strength score of 64 & a stock strength of 79, Molson Coors is a good choice for dividend investors, if:
- You believe in management’s new plan (I do).
- You don’t mind the choppy dividend growth (I don’t).
- You’re not looking for much capital growth from your Staples (I’m not).
Given how hard it has been to find quality non tobacco consumer staples trading at decent prices in the current market, I can’t help but be tempted by TAP. Following this article, I will likely initiate a starter position which could be increased to a full position as my confidence increases.
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