Pullback in AB InBev a Compelling Opportunity

Both the Belgium-traded ordinary shares and the ADRs of

We see three reasons for the relative underperformance of AB InBev: severe weakness in Brazil, a risk of a dividend cut, and an historically high multiple. All three are legitimate concerns, but we think all are overblown. Brazil is currently going through a turbulent economic period, and industry volumes are pressured. However, AB InBev’s 68% volume share gives it a cost advantage and greater financial flexibility over competitors, which should position it well in this premiumizing market for the long term. Fears over a dividend cut are not without foundation, but we believe the dividend can be sustained and increased at a low-single-digit rate until the firm reaches its optimal leverage ratio of 2 times debt/EBITDA by 2020. The high level of acquisition debt not only provides a risk to the dividend, but also distorts the near-term earnings power of the business. When debt has been paid down, we expect the SABMiller acquisition to be accretive to earnings, and the stock trades at just 14.6 times our 2019 estimate of EPS.

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