AB InBev: buybacks are a stronger signal than advertising noise

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AB InBev is ready for a comeback fight. The Belgian brewer still nurses the bruises from a bust-up with US consumers over its Bud Light advert. A fresh deal — this time with the Ultimate Fighting Championship — offers a chance to reconnect with core customers.

Third-quarter results on Tuesday highlighted the need for action. Group volumes were down 3.4 per cent overall. They were dragged down by volumes in North America that fell 17 per cent year on year.

The Bud Light dispute — when a collaboration with a transgender TikTok personality prompted a conservative backlash — had already knocked much of the fizz out of the shares. These are down about 15 per cent since the start of April. They have also de-rated from 19 times forward earnings to about 15 times today.

What the Bud Light saga highlights is that the company knows it has a problem. Trying to engage with a younger generation makes sense. Beer sales in the US are falling as drinkers switch to trendier spirits.

ABI’s peers are also struggling. Between 2014 and 2022, North American volumes at Canadian rival Molson Coors fell by a quarter versus ABI’s one-sixth fall. Shares in European brewers Heineken and Carlsberg have tracked ABI lower this year, derating accordingly. 

ABI’s longer-term underperformance can be pinned on the large debts taken on as part of its 2016 tie-up with SABMiller. It has been steadily paying these down. Its net debt-to-ebitda should fall to about three times this year, down from five times in 2018. That should mean more cash coming back to shareholders, says Trevor Stirling, an analyst at Bernstein.

ABI has made a start. It announced $1bn of new buybacks on Tuesday. That lifted shares by 4 per cent on the day. It may also signal the more sober attitude towards returns for which shareholders are thirsting.

An extra $2.6bn in total free cash flow is expected by 2025 compared with this year, according to Visible Alpha. Assume all that money goes on buybacks, add to that expected dividends and the annual yield comes to 5.5 per cent. With stats like that expect, plenty of shareholders to remain in ABI’s corner.