Constellation Brands (STZ) raises dividend by 30%, but only has a two year history of payments

Constellation Brands’ (NYSE:STZ) dividend was increased by 30%.  Its overall yield is 1.22%. The firm started paying a dividend in 2015.

Constellation Brands is one of the largest producers and importer of beer, spirits, and wine. Its primary brands in the wine category include Arbor Mist, Blackstone, Clos du Bois, Estancia, Franciscan Estate, Kim Crawford, Mark West, Ravenswood, Rex Goliath, Robert Mondavi, and Ruffino.  It premium spirits include Black Velvet Canadian Whisky and SVEDKA Vodka. The firm was founded in 1945 and is headquartered in Victor, New York.

Constellation Brands has maintained a two-year growth rate of dividends of 29.5 percent. Constellation Brands currently ranks 2nd in dividend yield within the large cap consumer goods, beverages – wineries and distillers category. The quarterly dividend for the May payment will be $0.52 versus the prior year rate of $0.40 per share. Constellation Brands is not a member  of our Top 100 Dividend Stocks.  (see below).

The dividend will be paid at the new higher rate on May 24, 2017, to shareholders of record at close of business on May 10, 2017. Constellation Brands is currently priced at $170.46. Listed in the table below are the quarterly dividend payments since 2015.

Date Quarterly Dividend
5/10/2017 0.52
2/7/2017 0.4
11/4/2016 0.4
8/8/2016 0.4
5/6/2016 0.4
2/5/2016 0.31
11/5/2015 0.31
8/7/2015 0.31
5/6/2015 0.31

Analysis of Constellation Brands is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 1.22% 490
Dividend Growth (3-7 year avg) NA NA
Forward P/E 19.28 313
S&P Financial Rating BBB- 511
Beta 0.95 281
Total Score NA
% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
1.22% NA NA 40 4.25 0.90 4.80 0.79% 1.22%

Positives;

  • Constellation Brands maintains an investment grade rating of BBB-.
  • Constellation Brands’ current dividend yield (1.22%) is at the top of its five-year average historical dividend yield.
  • Constellation Brands maintains a beta of 0.95, lower than the average company.

Negatives;

  • Constellation Brands has paid out a dividend for only 2 years.
  • Constellation Brands is trading above its ten-year average price/sales (P/S) ratio.
  • Constellation Brands’ dividend yield is below that of the S&P 500 Index.

Latest Earnings & Overall Analysis:

Constellation Brands issued its earnings data on April 6th. The company reported $1.48 EPS for the quarter, topping the consensus estimate of $1.37 by $0.11. Revenue rose 5.5 percent to $1.6 billion. Analysts were looking for revenue of $1.5 billion.The firm posted record results for the year with earnings per share of $7.52. The beverage giant posted $1.7 billion of operating cash flow and $789 million of free cash flow for the previous year.  Its outlook for the next twelve months was also positive and above expectations. It anticipates EPS of $7.80 a share at the mid point of guidance.  The firm bought back over 7 million shares of common stock for $1.1 billion last year.

 

Beer shipments were up 11 percent in the quarter on a year over year basis. Overall shipments of products rose by nearly 9 percent.  Operating margins also came in above analyst expectations at 38 percent.  Revenue growth is projected to be 9 percent next year with beer driving results.

2016 2015
Earnings per Share 6.65 5.43
Annual Dividend 1.6 1.24
Payout Ratio 24.06% 22.84%

 

The firm has moved towards higher-margin premium brands and the margin expansion is a direct result of this transition. Beer continues to be the leader for the firm with nearly 60 percent of revenue coming from this category. Wine and spirits generate the balance.  Spirits only showed 4 percent growth in the quarter, behind both beer and wine.  Modelo Especial revenue was up a stark 25 percent in the quarter.  Constellation Brands has a multitude of solid premium brands and strong diversification.  Mexican beers are the key category, with high margins and a large portion of final net income.

Although we agree that the firm has a leadership position with key brands, it trades at 19 times earnings and above its long-term price/sales ratio. The company only initiated its dividend two years ago, although the payout ratio is solid.  But its price rise and low yield make the firm less attractive. We prefer firms like Diageo with higher yields and longer dividend payout histories.

Earnings per Share 2017 (projected) 7.80
Dividend 2.08
Payout Ratio 27.73%

Based on the firm’s elevated P/S ratio, short dividend payout history, and below average yield, Constellation Brands, Inc. does not qualify as one of our Top 100 Dividend Stocks

Constellation Brands, Inc. Dividend Yield Chart (Click to enlarge)

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

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