Brown-Forman’s Key Risks
Consumer tastes unexpectedly evolve over time, which can hurt or hamper demand for Brown-Forman’s products. Most recently, bourbon sales in the U.S. have increased by more than 35% over the last five years and by 50% in international markets.
The surge in whiskey sales has certainly served as a driving force behind Brown-Forman’s business over the last five years, but it’s less clear how the next five years will play out. There is risk that the rate of growth slows more than the market expects.
Consumer trends are simply unpredictable. According to Brown-Forman’s 2015 annual report, American whiskey was a declining category from 1970 to 2010 as consumer tastes moved toward white spirits. Where demand goes from here is anyone’s best guess, but Brown-Forman’s business is concentrated in a single category, which creates concentration risk.
Beyond consumer trends, foreign currency exchange rate fluctuations (about 60% of Brown-Forman’s sales are in markets outside of the U.S.) and volatility in consumer spending can impact Brown-Forman’s near-term results. However, we believe these are transitory factors that have no bearing on the company’s long-term earnings power.
Finally, it’s worth mentioning that Brown-Forman is still largely a family-owned business. The company has a dual-class share structure, and its board of directors mostly consists of insiders. While creating shareholder value has not been a problem at all for Brown-Forman, it’s worth keeping the family ties in mind for corporate governance purposes.
Overall, as long as the American whiskey category continues to see growth and Brown-Forman continues investing in its Jack Daniel’s brand, it’s hard to find many fundamental risks with the business.
Dividend Analysis: Brown-Forman
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Brown-Forman’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Brown-Forman’s dividend payment is extremely safe with a Dividend Safety Score of 93. The company’s score is helped by its relatively low payout ratio, which sits at 37% over the last four quarters. As seen below, Brown-Forman’s payout ratios have historically been around 40%, which is extremely healthy for such a steady business.
Source: Simply Safe Dividends
In addition to its low payout ratios, Brown-Forman’s Dividend Safety Score is helped by the stable nature of the alcoholic beverage market. As seen below, the company’s sales fell by just 4% during the financial crisis, highlighting the non-discretionary nature of whiskey (consumers have a craving for whiskey whether times are good or bad). The business has also recorded 5% sales growth in each of the last five fiscal years despite the tepid growth of the global economy.
Source: Simply Safe Dividends
Thanks in part to the company’s steady sales growth, Brown-Forman has been a free cash flow machine. The business has generated positive free cash flow in each of the last 10 years and has seen free cash flow per share rise by more than 50% over the same time period, helping fuel its dividend growth.