Net profit margin increases show that this revenue growth has been profitable. Profit margins have risen in large part due to Brown-Forman’s focus on higher margin spirits rather than wine and consumer durable products. The image below shows the company’s transition to a nearly pure spirits business:
Source: Brown-Forman 2015 Barclay’s Global Consumer Presentation
Going forward, I expect Brown-Forman to continue compounding earnings-per-share at around 8% to 9% a year.
The company’s growth will come from continued revenue growth and share repurchases. Revenue growth will come increasingly from international markets. The image below shows the company’s international growth over the last 2 decades. This trend will continue.
Source: Brown-Forman 2015 Barclay’s Global Consumer Presentation
Brown-Forman currently has a below-average dividend yield of just 1.3%. The company’s dividend yield combined with its expected growth gives investors an expected total return of 9.3% to 10.3% a year.
Safety & Recession Performance
Brown-Forman’s business is exceptionally safe and stable. The company’s stock has a low beta of just 0.75. It sells an addictive product with a strong brand name that is in demand regardless of the economic climate.
The company’s earnings-per-share through the Great Recession of 2007 to 2009 are shown below:
- 2007 earnings-per-share of $1.90 (new high)
- 2008 earnings-per-share of $1.91 (new high)
- 2009 earnings-per-share of $2.06 (new high)
Brown-Forman had record earnings-per-share every year through the Great Recession. The company is very recession resistant. Click here to see the 10 most recession-proof Dividend Aristocrats.
Valuation & Final Thoughts
Brown-Forman Corporation (NYSE:BF.B) is a fantastic business that sells premium spirits.
Unfortunately, it also comes with premium pricing.
Brown-Forman investors should expect total returns of 9.3% to 10.3% a year before valuation changes.
The company is trading for a current price-to-earnings ratio of 32.6. This is far in excess of what a company with ~10% expected total returns should trade for.
As an example, The Coca-Cola Co (NYSE:KO) offers investors similar returns with a similar (meaning very little) level of risk – but it trades for a price-to-earnings ratio of under 20 (using adjusted earnings).
As a result of its overvaluation Brown-Forman is not a buy. The company does not rank well using The 8 Rules of Dividend Investing due to its high valuation and low dividend yield.
The company is of an exceptionally high quality and would make an excellent long-term holding if the right entry point presents itself.
If Brown-Forman stock ever trades for a price-to-earnings ratio of ~20, long-term dividend growth investors should consider adding it to their portfolio.
Disclosure: None
