Brown-Forman’s Dividend Growth Depends on a Recovery that Has Yet to Materialize

Brown-Forman Corporation (NYSE:BF-B), which produces Jack Daniel’s, Woodford Reserve, and other premium spirits, has a well-established track record of rewarding its shareholders. It has been paying regular dividends for 82 consecutive years and has increased its dividend for 42 years in a row. The most recent quarterly dividend declared is $0.231 per share, which amounts to $0.924 per year. With a share price of about $26.56, this annual dividend rate works out to a yield of around 3.5%, making it an attractive option for income-focused investors exploring dividend-paying beverage stocks. Investors can also compare its yield and track record with other highly ranked beverage companies.

Although the income stream is more attractive compared with Brown-Forman’s recent earnings performance, the fact that it has a good dividend-growth record does not ensure strong future returns. The company’s first-quarter results for fiscal 2027 gave dividend investors a mixed impression. Revenue dropped by 1% compared to the previous year, reaching $911 million, and operating income decreased by 3% to $252 million. In contrast, diluted earnings per share rose by 6% to $0.38, a result in part due to lower non-operating expenses and the effect of prior share repurchases. The increase in diluted earnings per share thus does not indicate any improvement in the company’s underlying operating performance.

The organic operating income rose by 4%, although organic sales did not change. The gross margin increased by 40 basis points to 60.2% due to lower costs, but the operating margin fell by 50 basis points to 27.7% as selling, general and administrative expenses went up by 5% on an organic basis. In contrast, ready-to-drink products performed well, with sales in that area increasing by 11% on an organic basis, thanks to New Mix. The results were still affected by weakness in tequila, the development of international markets, and barrel sales. Read more here: Brown-Forman (BF-B) Struggles with Weak Spirits Demand and Canada Headwinds

Dividend Coverage Remains Comfortable

Brown-Forman Corporation’s quarterly dividend rose to $0.231 per share from $0.2265 the previous year. The annualized dividend amount is $0.924 per share, and this continues the company’s 42-year record of consecutive dividend increases. The #1 company on our beverage dividend list has grown its dividend for 64 consecutive years. Check here.

The first-quarter operating cash flow rose by $13 million to reach $173 million, and the free cash flow increased by $32 million to $161 million. The dividend declared for the quarter amounts to about 45% of the reported free cash flow, which shows that the dividend was well covered during the period. This is encouraging, although it must be noted that a single quarter is not sufficient to determine a sustainable full-year run rate.

Management has kept its forecast for 2027, anticipating that organic sales will stay about the same and that organic operating income will drop by 3% to 5%. It also predicts capital spending will be in the range of $60 million to $70 million. The dividend thus seems affordable, but there will be scope for faster growth in the dividend only if the cost savings, changes to the distributor network, and product innovation are able to eventually result in stronger operating earnings.

Also Read: 10 Best Dividend-Paying Beverage Stocks to Buy Now

Forward P/E sets a higher bar for returns

BF-B has a forward P/E of 15.55x as compared to a trailing P/E of 16.96x. The forward multiple corresponds to an earnings yield of about 6.4%. The yield is higher than the approximately 5.1% yield on the 10-year U.S. Treasury bond, but the premium is only around 1.3 percentage points. Equity earnings are unlike Treasury income in that they are uncertain, and Brown-Forman’s prospects indicate that another year of pressure on operating income is to be expected. The spread will thus provide only limited relief should earnings fail to meet expectations or if the valuation multiples shrink.

The lower forward P/E than the trailing multiple suggests the market expects some earnings recovery. However, given that management has forecast flat organic sales and a decline in organic operating income between 3% and 5%, it is difficult to justify the idea of a quick rebound unless there is better execution. This gap might be due to the expectation of normalization rather than a return to sustained growth.

Brown-Forman’s valuation has also dropped considerably from the much higher multiples that were observed in previous years. Yet it is hard to justify paying a premium to the slower-growth spirits companies when Pernod Ricard has a forward P/E of nearly 10.35x. Although differences in geography, brand mix, and accounting prevent a direct comparison, the gap does raise a reasonable question about how much investors should pay for Brown-Forman’s brand strength.

Conclusion

The dividend paid by Brown-Forman appears to be sustainable since it is backed by strong free cash flow and a long track record of annual increases. With a yield of about 3.3% at a price of $28.29, it provides a significant source of income, but the forward earnings yield gives only a small advantage over that of Treasury securities. For investors seeking dividends, the argument depends on the company’s resilient cash flow and on eventual earnings stabilization, not just on its dividend history. As long as organic growth does not improve, the stock’s valuation leaves little room for any execution errors.

READ NEXT: Verizon’s Low Forward P/E and a 6.5% Dividend Yield Make a Compelling Case and ArcherDaniels’ Dividend Reliability Meets Cyclical Uncertainty

This article is originally published at Insider Monkey.