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Brown-Forman’s Been Very Busy Allocating Capital This Fall
Brown-Forman (BF.B) announced on October 6 that it had acquired Venezuela’s Diplomático Rum brand from Destillers United Group S.L. While no terms were disclosed, estimates put the brand’s worldwide annual revenue between $50 million and $100 million.
Although the dollar amounts for this acquisition might not end up being very large, it puts Brown Forman in the driver’s seat regarding the rum business.
Louisville-based and family-controlled, Brown-Forman has been very busy this fall making strategic acquisitions. In September, the company acquired the Spanish ultra-premium gin brand Gin Mare from Vantguard and MG Destil Destilerías.
Brown-Forman continues to make intelligent moves that advance the company’s goals in the liquor industry without breaking the bank. Its capital allocation is second to none.
If you’re thinking about making a fun investment, Brown-Forman just reminded investors why it’s always worth consideration. Long-term, whether you’re after capital appreciation or income, Brown-Forman makes a rewarding choice.
Here’s why.
It Enters a New Category
You'll notice if you go to Brown-Forman’s brands' page brands' page is that it has no representation in the rum category. None. It has Jack Daniel’s for American whiskey, Benriach Scotch, Finlandia vodka, Herradura tequila, Fords gin, Chambord liqueur, and even Sonoma-Cutrer wine, but no rum.
Diplomático Rum is one brand I’ve never tried -- I live in Nova Scotia, where rum is a religion -- but I have always read and heard good things about it.
“The Diplomático Rum family of brands is the No. 1 super- and ultra-premium rum and the No. 2 super-premium+ rum worldwide (IWSR, 2021). Super-premium+ rum has grown at an annual rate of 17% over the past five years, with rum accounting for approximately 8% of global spirits,” stated the company’s press release announcing the deal.
Globally, rum is on the rise. In 2020, the rum category in the U.S. saw sales increase by 4% to 25.1 million cases from 24.1 million in 2019. Although they fell by 1.4% in 2021 to 24,740, they were still reasonably high.
More importantly, the super-premium category, where Diplomático shines, has seen yearly increases in cases sold for 12 consecutive years. In 2009, 197,000 cases of super-premium rum were sold. In 2021, case sales had grown to 853,000, a compound annual growth rate of 13%.
Not many categories can claim this kind of extended growth. Brown-Forman’s going to take Diplomático to the next level.
Shareholders win.
Brown-Forman Has Superior Capital Allocation
The Kentucky company’s purchase of Herradura tequila for $876 million in August 2006 was the largest acquisition in its long history that dates back to 1870.
It takes capital allocation seriously. It’s not one for throwing around money. The company’s 2022 annual report discusses why capital allocation is so important.
“We are proud to be a member of the prestigious S&P 500 Dividend Aristocrats Index, having paid regular quarterly cash dividends for 78 years and increased the dividend for 38 consecutive years,” states pg. 6 of the 2022 annual report.
“Over the past 10 years, we have returned $7.1 billion in cash to shareholders with $2.9 billion in regular dividends and $2.4 billion in share repurchases. We have also paid $1.8 billion in special dividends, which includes the special cash dividend of $1 per share, or approximately $480 million, on our class A and Class B common stock, that was declared in fiscal 2022.”
Brown-Forman is one of those businesses that get better with age. Led by its iconic Jack Daniel’s brand, the company’s governance model is all about the long-term. Everything it does is for the next generation of shareholders and the ones after that.
Its success starts with Jack Daniel’s and goes from there.
In 2022, the Jack Daniel’s brand of products reported 20% sales growth, selling 14 million 9-liter cases, making it the largest premium spirit brand by volume in the world.
However, with acquisitions like Diplomático Rum, it continues to build an even stronger foundation for future growth.
The Bottom Line
What I find striking about Brown-Forman is that over the past two years, it has grown its non-whiskey revenue by a significant amount, yet its whiskey revenue consistently accounts for 79% overall. It doesn’t budge.
Tequila revenues grew 32% between 2020 and 2022 to $364 million, while wine increased by 18% to $219 million. Vodka was the only disappointment, flat over the past two years at $109 million.
The company reported its Q1 2023 results at the end of August. Sales increased 11% to $1.0 billion while operating income increased 19% to $343 million. Its operating margin rose by 220 basis points to 34.1% from 31.9%.
Financially, it’s solid as a rock. At the end of July, its net debt was $1.35 billion, a very low 4% of its market cap.
Brown-Forman is one of those companies that seems to fly under the radar. News stories like the Diplomático Rum acquisition remind me why I like it so much.
It’s a long-term buy.
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