We’re Buying This Stock on Tuesday, September 11

According to a 2015 study by Philosophical Economics, tobacco was the only industry that was a better investment than beer over an eight-decade stretch.

The success of booze companies shouldn’t be a major surprise. After all, people drink both to celebrate and to commiserate.

Whether happy or sad, it’s the all-purpose consumer staple!

My daughter got married in Mexico a few months ago; the resort had only a few brands of beer on the menu, so I happily quaffed a Corona (or two) and a Modelo (or three).

Constellation Brands (STZ) owns the Corona and Modelo labels … and come Tuesday, Sept. 11, DTA’s Income Builder Portfolio will own about $1,000 worth of STZ stock.

After I execute a purchase order on Daily Trade Alert’s behalf, Constellation will become the 16th holding of our real-money, Dividend Growth Investing endeavor.

Here’s To You, Constellation!

Having recently made cigarette giant Altria (MO) the IBP’s largest position, it seems only fitting that we add a boozy “sin stock” to the portfolio.

Constellation has been in the news lately because in August it struck a deal with Canopy Growth (CGC) to take a 38% stake in the Canadian cannibis company.

(Eventually, STZ could own 50% of CGC under terms of the deal.)

As more countries — not to mention more U.S. states — legalize pot, investors have been waiting to see which companies would be best positioned to take advantage of the movement.

Well, Constellation is making a huge statement.

Still, even after this $4 billion investment in marijuana, STZ will continue to be mostly about booze.

Constellation owns six of the top 11 beer brands in the United States, and it is especially popular among Hispanic customers. Given the growth of that demographic, it’s pretty easy to get excited about the company’s prospects in this realm.

Performance Anxiety

Constellation had a rare earnings miss in the first quarter of 2018 — and it was a rather large one, failing to meet expected earnings per share by 23 cents.

The company had exceeded EPS expectations — usually by healthy margins — in each of the previous 14 quarters.

Graphic from Fidelity; data from Thomson Reuters

I’m not especially concerned about that blip in performance, however.

Indeed, the miss — combined with initial negative reaction to the Canopy deal — resulted in a little pullback that gives investors an opportunity to get a premium stock at a more attractive price.

STZ also reaffirmed its guidance for fiscal year 2019 at $9.40 to $9.70 per share.

The following FAST Graphs illustration shows just how strong earnings have been for Constellation, especially in recent years.

The company’s earnings have done little but go up since the turn of the century, moving higher at a significant clip the last five years (blue circled area and arrow). The forecast is for continued double-digit growth (red circle).

Let’s Talk Pot

I like the idea of investing in marijuana’s future as a legal consumer product. Nevertheless, as is the case with many DGI practitioners, I am not much of a speculator in new industries.

Constellation’s considerable stake in Canopy gives shareholders a unique opportunity to buy into the trend of legalized pot while maintaining a sizable “hedge” — namely, a business that is about a lot more than weed.

So why pot? Well, why not? As part of its presentation to the Barclays Global Consumer Staples Conference on Sept. 5, Constellation called cannibis a “once-a-century disruptive market transition.”

STZ also produced two slides showing the opportunities awaiting companies that successfully navigate the growing market for pot.

As for its specific choice of Canopy as its pot partner, Constellation presented two slides that detailed CGC’s strength, breadth, footprint and infrastructure.

Finally, there is the important factor of control.

As part of the deal, which is subject to regulatory approval and which the parties hope to close in October, Constellation will have the right to nominate four members to Canopy’s seven-person Board of Directors.

Also, Canopy must get consent from Constellation before making “material transactions” — which are defined as acquisitions of greater than $250 million in Canadian dollars, and divestitures of more than $20M CDN, as well as mergers, bankruptcies, dilutive transactions and changes in dividend policy.

As For That Dividend …

Graphic from Fidelity

As you can see in the above graphic, Constellation has aggressively grown its payout since initiating it in 2015.

With its annual dividend now at $2.96 — up 42% from the previous year and 85% over two years  — STZ is yielding 1.4%.

Even though that makes Constellation one of the Income Builder Portfolio’s lowest yielders, the company has a low payout ratio (about 25%) and figures to provide nice dividend increases for years to come.

Wrapping Things Up

For its large stake in Canopy, as well as its ability to have significant input into CGC’s operations, Constellation paid a hefty premium — its per-share offer was about 50% above Canopy’s price the day of the deal.

Given the bright future of cannibis, however, we all might look back 10 or 20 years from now and say: “Wow, what a bargain Constellation got in 2018!”

I like to think we’ll have similarly positive things to say about the IBP’s investment in STZ. Historically, beer stocks have been very kind to investors, and this booze purveyor just got a lot more interesting.

In my next article, to be published Wednesday, Sept. 12, I will detail our purchase. I also will discuss Constellation’s valuation and other pertinent information.

There is risk in owning any stock, even those that don’t venture into a relatively uncharted industry like marijuana. I strongly urge potential investors to conduct their own due diligence.

— Mike Nadel

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