Brazil-based Companhia De Bebidas Das Americas (NYSE:ABV), more commonly known as AmBev, is Latin America’s biggest brewer. The company also is majority-owned by Anheuser-Busch (NYSE:BUD), which truly is the “king of beers” after the European leader InBev took over the No. 1 American brewer. So with AmBev, you invest in the higher-growth subsidiary of the largest brewing company in the world.
Since AmBev is growing faster than InBev, ABV shares trade at higher valuation multiples (7.1 price/book, 6.8 price/sales) than the parent (2.5 price/book, 2.4 price/sales). This has allowed for an interesting accounting anomaly where InBev sports a market cap (as of the time of this writing) of $94.09 billion, while AmBev has a market cap of $112.27 billion — in the alchemy of finance, the subsidiary is worth more than its majority shareholder.
There are good reasons why AmBev shares support higher valuation multiples. Average four-quarter operating margins for the company come in at 41.32%, while for InBev they are 30.87%. Under U.S. GAAP, ownership of another company larger than 20% has to be consolidated in the financial performance of the parent. The operating margin comparison is one way of demonstrating that the beer business is simply more profitable in emerging markets (where AmBev is concentrated) than in developed markets (where the parent has the majority of its remaining operations).
Another reason for the higher market cap is the appreciation of the Brazilian real (BRL) as it is reflected in the performance of the ADR. Brazil has the highest real interest rates of any major economy in the world — the short-term nominal rate is currently 11%. This is a long-term policy of the Brazilian government, and thus a major positive for holders of Brazilian assets.
In addition to the currency tailwind beneficial to shareholders, AmBev has had a very high dividend yield of around 4%, but in many quotation services the number is erroneously reported lower. This is because the company does not pay dividends every quarter, but rather two to three times per year at the discretion of the board.
In the U.S., companies like to pay dividends regularly and maintain the payout at all cost, which sometimes puts a strain on company finances. In many countries in Latin America and Asia, boards approve dividends when there is idle cash, and when there is better use for the money, they don’t feel obligated to pay if that is in the long-term interest of the company — some argue this is a better way to reward shareholders.
