InBev Dividend Move Puts Pressure on Rivals

London, March 14 – Brewing giant InBev\’s decision to use up to 80 percent of its earnings to pay dividends comes as analysts and investors call for rivals to follow suit as acquisitions dry up and cash flows are strong.

After a number of years of mega deals including the one that created InBev in 2004 and the recent takeover of Scottish & Newcastle, more stable times faced by the brewing world have put increased emphasis on how companies reward investors.

The world\’s second biggest brewer InBev with low debt and strong cash flows made the surprising dividend move late last month, leaving London-based rivals Diageo and SABMiller lagging behind on dividend ratio payouts.

Analysts say evidence suggests that increased dividend payouts have a clear effect on share prices over time while share buybacks at best have a more muted effect, and urged these companies to payout more directly to shareholders in dividends.

\”We want bigger dividends, maybe not to the 80 percent level but there is growing pressure on companies,\” said analyst David Liston at Barclays Wealth.

He expects others to look carefully at what InBev has done although Diageo is committed to a more balanced approach of dividends linked to share buybacks.

SABMiller is using its strong cash flow to fund heavy capital expenditure.

Last month, InBev, the Belgian brewer of Stella Artois, Beck\’s and Brahma swept away its 33 percent cap on its dividend payout ratio to give four-fifths of earnings out as dividends.

This put InBev ahead of spirits and brewing giant Diageo at 59 percent, world No 1 brewer SABMiller at 42 percent, Heineken at 30 percent and Carlsberg at 20 percent.

InBev\’s dividend yield is the highest in the sector at 4.1 percent, and puts it on the highest multiple trading at 15 times 2009 forecast earnings against SABMiller\’s 14.2, Diageo\’s 13.4, Carlsberg\’s 13.3 and Heineken on 13.

\”For companies like InBev with reliable income streams it makes sense to pay a high pay-out dividend ratio as it aligns the interest of managers and shareholders,\” said James Clunie investment director for UK equities at Scottish Widows Investment Partnership.

He said evidence suggests high dividend pay-outs lead to good total shareholder returns whereas the evidence is more mixed for buybacks. But he adds for cyclical stocks and those under financial pressure a higher dividend ratio is more risky.

Another UK fund manager said that tax can be a consideration for those funds that are liable to pay taxes on dividend, and so they may prefer share buybacks to give them flexibility to avoid tax or control when they pay it.

Diageo, the world\’s largest alcoholic drinks company with brands such as Smirnoff vodka and Guinness beer, says it is committed to returning cash through both dividends and share buybacks, appealing to shareholders\’different views.

Back in 2004, Diageo said its aim was to grow dividends by around 5 percent a year until its dividend cover — the number of times a dividend can be paid out of earnings — approaches 2. It currently stands at 1.7.

\”We are satisfied that our dividend is currently pitched at the right level and that continuing our share buyback programme is the best option,\” said a Diageo spokeswoman.

The company plans 1 billion pounds of share buybacks in its year to June 2008 and analysts estimate 900 million pounds in dividends giving a current year return of 1.9 billion pounds.

In comparison, InBev will return 2 billion euros in 2008 with its 2007 dividend paid in April costing 1.5 billion euros and a more limited 500 million euro share buyback.

SABMiller targets a dividend cover between 2.2 and 2.4, and is currently at 2.2.

It has a policy of wanting to keep cash back to give its flexibility with capital investment, in areas such as Colombia, and for acquisitions.

\”We aim to have some flexibility with cash for capital expenditure and mergers and acquisitions,\” said a company spokesman. The group has no current share buyback programme.

SABMiller has grown strongly by acquisitions rising to be the world\’s biggest brewer from No 5 in 1999 when it moved its listing and headquarter to London.

Its big acquisitions were Miller in 2002 and Latin America\’s Bavaria in 2005.

But these drinks groups may come under increasing pressure because of their relatively low debt, the lack of big cash deals in the brewing pipeline and their strong cash flows.

\”These consumer goods groups have strong balance sheets, and with M&A activity likely to decrease over the next years and with strong cash flows there is likely to be a trend to dividend increases,\” said Liston at Barclays Wealth.

Analysts say if InBev does plan a mega-deal, such as the long-rumoured linkup with world No 3 Anheuser Busch, it would be similar to the all-share deal in 2004 which saw Interbrew takeover Brazil\’s AmBev to form InBev.

They point out with InBev controlled by the Interbrew and AmBev families with a free float of just 35 percent, a dividend payment is a more direct way of rewarding key shareholders.