How Much Is Anheuser-Busch InBev’s Deleveraging Program Expected To Add To Its EPS?

Anheuser-Busch InBev (NYSE: BUD) is expected to see a $30 billion cumulative reduction in its total debt by 2020, from its highs of 2016. At this stage it would be interesting for the investors to know how much are they gaining out of the company’s focus on reducing debt.

Overview

• Anheurser-Buch InBev saw its debt burden increase from $49.5 billion in 2015 to $122.6 billion in 2016, primarily due to additional debt raised to fund the $100 billion-plus SABMiller acquisition.
• However, the management has redirected its efforts to reducing the outstanding debt to boost margins, enhance shareholder returns, and have a sustainable balance sheet.
• Trefis estimates that the projected decrease in debt could lead to an additional net income of $721 million and an incremental EPS of $0.36, over the next two years.

You can view the Trefis interactive dashboard – Impact of Anheuser-Busch InBev’s Debt Reduction Initiatives On Its EPS – and alter the assumptions to arrive at your own estimates for the company’s debt, interest expense, and EPS. In addition, here is more Consumer Staples data.

Improving Cash Flow

• BUD’s cash flow from operations has increased from $16 billion in 2016 to $21.6 billion in 2018, driven by a corresponding rise in revenue base and improving margins.
• Operating cash flow is expected to improve further in the near term, as the company benefits from increased premiumization of its brands leading to higher revenue, while also seeing further improvement in profitability.
• The company’s efforts at reducing cost have also been successful with it refinancing a large portion of its high-interest debt instruments, at a lower interest rate currently. For example: New bond issuance of $15.5 billion in February 2019, to pay off its existing higher interest debt, is expected to contribute to growth in the company’s bottom line.

Interest Savings Of $0.72 Billion Due To Lower Debt

• Post the SABMiller deal in 2016, BUD has been able to reduce debt by about $12 billion in two years, with the company’s total debt standing at $110 billion at the end of 2018.
• Interest expense of $4.14 billion in 2018 was 3.8% of the total debt for the year.
• With the company mentioning that deleveraging would be its primary focus in the near term, we believe that the reduction in debt over the next two years would be greater than the previous two.
• Thus, if total debt falls to $90 billion by 2020, even at the same interest expense ratio (3.8%), interest expense would decrease from $4.14 billion in 2018 to $3.42 billion in 2020, marking a decline of $0.72 billion or 17.4%.
• Reduction of $0.72 billion in interest would be a corresponding increase in the net income over the next two years.

Incremental EPS of $0.36

• Outstanding shares at 1.98 billion would translate this additional net income of $0.72 billion into an incremental earnings per share of $0.36

Conclusion

• Trefis analysis shows that the success of this deleveraging program would provide BUD’s shareholders with better returns in the form of incremental EPS of $0.36.
• On the completion of the program, BUD has indicated that it will now focus on other methods of rewarding its investors, probably through a higher dividend, which has been curtailed currently to ensure more resources are available for debt repayment.
• A better balance sheet position, lower leverage, and enhanced shareholder returns are likely to help support the company’s stock price growth.

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