Dividend Aristocrats In Focus: Brown-Forman Corporation

Updated on January 24th, 2023 by Quinn Mohammed

The Dividend Aristocrats are a group of 65 companies in the S&P 500 Index with 25+ consecutive years of dividend increases.

Within the Dividend Aristocrats, there are varying types of stocks with differing yields. Some of the Dividend Aristocrats have higher yields, but these high-yielders tend to grow their dividends at a lower rate each year.

At the same time, there are Dividend Aristocrats with low yields. While these may look unappealing on the surface, they often provide higher levels of dividend growth from year to year. An example of this is Brown-Forman (BF.B), a Dividend Aristocrat that has increased its dividend for 39 consecutive years.

There are currently 65 Dividend Aristocrats, including Brown-Forman. You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with metrics like dividend yields and price-to-earnings ratios) by clicking the link below:

Brown-Forman has paid a dividend for 79 years and historically increased its dividend at a high rate. Since 2012, the company has increased its dividend at a compound annual growth rate of ~6.1%. However, its dividend increase last year was above this mark at 9% on November 17th, 2022.

This article will discuss Brown-Forman’s business model, growth prospects, and valuation.

Business Overview

Jack Daniel’s Tennessee Whiskey got its start all the way back in 1865 when Jack Daniel purchased Cave Spring Hollow. The following year, he registered the Jack Daniel Distillery, which is today America’s oldest registered distillery.

Brown-Forman has a large product portfolio focused on whiskey, vodka, and tequila. Its most famous brand is its flagship, Jack Daniel’s whiskey. Other popular brands include Herradura and el Jimador tequila and Finlandia vodka.

Source: Investor Presentation

Brown-Forman reported its second-quarter (fiscal 2023) earnings results on December 7th, 2022. The company generated revenues of $1.1 billion in the period, which was up 10% from the revenues the company generated during the previous year’s quarter. Brown-Forman’s revenues came in ahead of the analyst consensus, beating it by $10 million.

Brown-Forman’s earnings-per-share totaled $0.47 during the second quarter, which missed the consensus analyst estimate by $0.08. For the full fiscal year 2022, Brown-Forman generated $1.74 in earnings-per-share, which was a 7.4% decrease compared to 2021.

We forecast that in fiscal 2023 Brown-Forman will achieve earnings-per-share of $1.90, which would mark a 9.2% year-over-year increase.

Growth Prospects

Brown-Forman has a strong growth track record; the company even increased its earnings-per-share during the last financial crisis, as demand for alcohol is not especially cyclical. From 2013 to 2022, Brown-Forman grew its earnings-per-share by a 4% average compound rate. Earnings-per-share were driven by a combination of several factors, including revenue growth, rising margins, and the impact of a declining share count.

Because Brown-Forman owns strong brands and is active in the super and ultra-premium alcoholic beverages markets, which see consistent market growth, Brown-Forman should be able to keep its revenue growth going forward.

This has been an important growth factor for Brown-Forman in the past. Brown-Forman’s Jack Daniels brand and its American super-premium whiskeys continue to grow around the globe.

Higher overall sales allow for margin increases due to better economies of scale, which makes the company more efficient overall, and positively impacts its net earnings growth rate.

In addition, Brown-Forman has aggressively repurchased shares in the past decade, which adds some additional growth to its bottom line. Going forward, there is plenty of growth potential left as the company further expands its product line inside and outside its flagship Jack Daniels brand.

Furthermore, the company will purchase growth through acquisitions, for example, its recent purchase of the Diplomático Rum brand. This purchase launched Brown-Forman into the growing super-premium+ rum category. Diplomático Rum is a super-premium rum from Venezuela and is distributed in over 100 countries.

Source: Investor Presentation

We are forecasting 8% annual earnings-per-share growth over the next five years.

Competitive Advantages & Recession Performance

Brown-Forman has many competitive advantages. Its famous brands yield significant pricing power. And it has a highly profitable business, with low manufacturing and distribution costs, because of its global scale. These qualities help Brown-Forman generate consistently high returns on invested capital.

Brown-Forman is also very resistant to recessions. This is typical among alcohol stocks, as their products tend to be consumed in greater volume when economic times are tough. One could argue that alcohol manufacturers actually perform well during recessions.

Brown-Forman’s earnings-per-share through the Great Recession are shown below:

  • 2007 earnings-per-share of $0.76
  • 2008 earnings-per-share of $0.77 (1.3% increase)
  • 2009 earnings-per-share of $0.82 (6.5% increase)
  • 2010 earnings-per-share of $0.95 (15.9% increase)

As you can see, the company grew its earnings-per-share every year through the Great Recession. This is a rare achievement that demonstrates the company’s defensive business model. Put simply, spirits manufacturers such as Brown-Forman are among the most recession-resistant businesses.

Valuation & Expected Returns

Based on our estimate for 2023 earnings-per-share of $1.90 and a current share price near $67, shares of Brown-Forman are currently trading at a P/E ratio of 35.0.

This is a very high multiple, even considering the strength of Brown-Forman’s business. We estimate a fair value P/E ratio of 24.

If shares were to revert to 24 times earnings, this implies the potential for a -7.1% valuation headwind over the next five years. On this basis, the valuation appears especially stretched, even by Brown-Forman’s lofty standards.

A strong earnings growth rate of 8% and the 1.2% dividend yield will help, but a reduction in the security’s valuation to a more “normalized” level would nearly wipe out any intermediate-term total return potential.

Investors should note that Brown-Forman pays a special dividend on occasion. For example, Brown-Forman paid a special dividend of $1.00 per share in 2021. Previous special dividends from Brown-Forman were paid in 2018 and 2012, so it is not something the company does every year.

Overall, the expected returns for Brown-Forman are 1.7% per year.

Final Thoughts

Brown-Forman has a dominant position in its core product categories. Its flagship Jack Daniel’s brand, should continue to lead the whiskey industry, with high growth from its smaller whiskey brands and tequila. The emerging markets are also an appealing growth catalyst, and of course, the dividend growth streak is enviable.

Brown-Forman is a good example of a great business trading at an exceptionally high valuation. Despite a solid dividend and very strong business, shares do not look particularly compelling for purchase right now.

Related: My Top 10 Buy & Hold Forever Stocks.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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