“In Most Countries, a Company This Profitable Would be Illegal …”

By Travis Johnson, Stock Gumshoe, March 4, 2009

This teaser is all about “Weather[ing[ the Recession with Chile’s Can’t-Lose Beer Monopoly” — and who doesn’t love that? There’s nothing like a monopoly to set the little dollar signs spinning in our eyeballs, with visions of a swim in Scrooge McDuck’s Money Bin dancing in our dreams.

And a beer monopoly? Even better! Alcohol is often served up by investing pundits as an antidote to recession — even though most beer, liquor and wine stocks have gotten clobbered along with the rest of the market, the argument continues that even in a recession, people drink. And if it gets bad enough, people might drink even more.

Is that true in Chile, too? I dunno … but let’s investigate this one, shall we?

The teaser comes in from High-Yield International, which is, as it sounds, a newsletter that specializes in high dividend foreign stocks. It’s from the folks at StreetAuthority — I last wrote about this newsletter back in November, when they were touting Telefonica O2, HiMax, and a high yield closed end fund, one of which (Telefonica) is actually up now.

So what’s today’s tease?

Well, it’s not exactly a top secret company — they supply several clues and some facts to buttress their claim that this is a great investment, of course … so let’s take a quick look:

“How would you like to get a cut of the take almost every time someone pops open a beer in Chile… or a bottle of juice or mineral water for that matter?

“When a Chilean says “Una cerveza, por favor,” seven times out of eight, he’s getting a brew made by the most profitable company in Chile. It absolutely dominates Chile’s beer market with an 85% market share.

“This brewing giant is not only the largest beer maker in Chile, it’s the second-largest in Argentina, too — thanks to its hugely popular Cordoba beer. And Argentina’s market is four times bigger than Chile’s.

“It is Chile’s only bottler of Pepsi, Dr. Pepper, Snapple, Crush and Canada Dry. The company also distributes Heineken, Corona, Negra Modelo, and Guinness.”

Sounds great, no?

They go on to tell us that the dividend was hiked 45% last year, and that it tripled in the four years before that — it currently yields 5.9%, which no longer sounds like a huge dividend yield, since so many yields are sky-high right now … but, if it’s sustainable, it’s certainly nothing to sneeze at.

So what is this Chilean monopoly? As you might suspect, it wasn’t even really necessary to fire up the Thinkolator for this one … today we’re looking at:

Compania Cerveceria Unidas (CCU, traded as an ADR on the NYSE)

They are indeed the dominant beverage company in Chile, with big shares of the beer and soft drink markets and large operations in mineral water, nectar, and liquor (mostly pisco, a fortified wine). They are also significant exporters, mostly of Chilean wines through their acquisition of Vina San Pedro back in the 90s. They do make their own beers and soft drinks and bottle and distribute other products, as teased.

And the dividend for last year was pretty nice — they pay twice a year, last year it totaled $1.53, so with a share price of $27.12 we’ve currently got a trailing yield of about 5.6%. The company’s policy is to distribute at least 50% of earnings as dividends, and the dividend is in no way a set amount, it will fluctuate each year as income changes — it may go up or down.

If you do investigate this stock, be careful — for some reason, some publishers persist in mixing up these guys with our old friends at Clear Channel. Company Cerveceria may or may not be a great investment, but at least it isn’t a radio station or billboard operator.

According to their annual report, released at the end of January, CCU earned $2.04 per share in 2008, which would give them a trailing PE ratio of about 13 — a bit cheaper than big Mexican brewer FEMSA or US brewer Molson Coors (neither of which is necessarily a very good match for this firm), but in a similar neighborhood. Earnings were down 4% last year, though operating earnings and revenue were both up smartly, and the dividend payout was well above 50% (If they earned $2.04 and paid out $1.53, that means their payout ratio was 75%). The company has a pretty good investor relations website with more detailed information, if you’re curious.

The company has been growing in their Argentinian business, and through acquisitions in both beer and wine, and some of their results suffered year-over-year due to the devaluation of the peso against the dollar, and to increases in raw material prices. Their highest margin business is domestic beer sales, which is also fairly steady and accounts for a bit more than half of their total profit — growth is coming from lower-margin businesses, with the most dramatic growth coming from beer sales in Argentina, thanks both to organic growth and to acquisitions.

Net debt has gone up a little bit in the past year, but doesn’t seem particularly onerous — the net debt is about $300 million, which is pretty close to being their EBITDA for last year. The company has two large shareholders — Quinenco, a big Chilean conglomerate, and Heineken, who together control about 66% of the company through their Inversiones y Rentas joint venture. About 8% of the shares trade as ADRs in NY — if you’re looking through their filings and comparing them to sales numbers or other data, do note that the ADRs have a 1:5 ratio, meaning each share you trade in NY equals 5 shares on the Chilean exchange. And just FYI, the US dollar is now worth about 611 Chilean Pesos, down a bit from the 636 that was used in their report of 2008 earnings.

So … is the Chilean beverage business something you want to get involved in? That’s your call — I’d say that the positives are that they have big and strong controlling shareholders who are probably focused on the long term, they pay a solid dividend, and they have a bedrock Chilean beer business that steadies their more aggressive expansion ventures — the biggest negatives would probably be a fear of Chile’s economy sinking, a failure to compete in Argentina that would hamper growth, or whatever wildly unpredictable swings we might see in the Chilean Peso that might wreak havoc with input costs or wine exports.

Let us know if you’ve got a thought or a feeling on this one — I don’t currently own any stocks in the alcohol business, but I’m doing my little part to support all of these businesses as a consumer during these tough times.

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Mary Ann
Mary Ann
March 4, 2009 12:00 pm