A Cheap Dividend Aristocrat to Buy Before It Bounces Back

Brown-Forman BF.B has had an awful year: Consumer belt-tightening has hurt sales, and the stock is down more than 20% in the past 12 months. But we think this dividend aristocrat looks attractive. Storied brands that include Jack Daniel’s have allowed the company to carve out a wide economic moat that will benefit from the ongoing premiumization trend in spirits. Brown-Forman earns a spot on our list of 40 of the Best Investment Picks. This dividend stock is also among Morningstar chief US market strategist Dave Sekera’s 5 Undervalued Stocks to Buy to Play a Little Defense.

With over 150 years of distilling experience specializing in Tennessee whiskey and Kentucky bourbon, Brown-Forman has earned accolades and loyalty from drinkers for distinct flavors and consistent quality, building strong brand equity for its core Jack Daniel’s trademark in the US and globally. We like the growth prospects of this premium spirits maker, as its high-end positioning in the structurally attractive whiskey category (where a lengthy maturation process creates significant entry barriers) aligns well with the industry’s premiumization trend. We also think company is poised for volume expansion, thanks to a strong innovation pipeline of promising new releases not only in whiskeys and tequilas but also in the fast-growing ready-to-drink category. We expect Brown-Forman will continue to thrive thanks to its advantaged competitive position and the Brown family’s long-term focus.

Key Morningstar Metrics for Brown-Forman

• Fair Value Estimate: $59
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: Medium

Economic Moat Rating

We believe Brown-Forman has a wide economic moat, thanks to strong brand loyalty and the tight client relationships that the spirits maker has cultivated and maintained for decades in its core whiskey business, which contributes 70% of total sales. Thanks to the popularity of Jack Daniel’s and bourbon brands Woodford Reserve and Old Forester, Brown-Forman holds the top value share globally in the $27 billion American whiskey category, according to Euromonitor. The company also benefits from cost advantages by leveraging its scale in raw material procurement, advertising, and distribution. With its durable competitive position in the structurally attractive premium spirits market, we expect the company to deliver returns on invested capital (with goodwill) above our estimated 7% weighted average cost of capital for more than 20 years.

Read more about Brown-Forman’s moat rating.

Fair Value Estimate for Brown-Forman Stock

Our $59 fair value estimate implies a 28 times multiple against our fiscal 2025 adjusted earnings estimate and a fiscal 2025 enterprise value/adjusted EBITDA multiple of 22 times. Our forecast 5% revenue compound annual growth rate over the next 10 years is driven by our expectation for steady increases in spirits volume (by low to mid-single digits annually) and pricing (low single digits annually), consistent with historical trends. We expect the core American whiskey category will remain the key top-line growth driver, with incremental revenue from new product launches and more effective owned distribution in Europe and Asia-Pacific. We model operating margin to expand to 35.8% at the end of our 10-year forecast period, up 180 basis points from prepandemic 2019. We expect gross margin expansion of roughly 40 basis points over the same period.

Read more about Brown-Forman’s fair value estimate.

Risk and Uncertainty

The spirits maker is exposed to regulatory and tax headwinds in the US and key international markets, where excise tax increases stand to make spirits products more expensive to consumers, and health warning labels may discourage consumption or tarnish brands. Future trade disputes between the US and its major trade partners could result in the return of tariffs on the import of US products, including American whiskey. Brown-Forman also faces increasing competition from a growing number of craft distillers. Shortages or price fluctuations of key agricultural ingredients or packaging materials is another risk that the premium distiller must contend with.

Read more about Brown-Forman’s risk and uncertainty.

Brown-Forman Bulls Say

• Premiumization trends in spirits consumption, coupled with Brown-Forman’s strong innovation pipeline, bode well for mid- to high-single-digit top-line growth in the coming years.
• Acquisitions of superpremium gin and rum brands should diversify Brown-Forman’s portfolio and help open more doors with distributors and on-premises operators in Europe.
• The ongoing conversion to owned distribution in key international markets in Europe and Asia-Pacific should elevate brand positioning and foster closer ties with on-premises and retail clients.

Brown-Forman Bears Say

• Brown-Forman is less diversified by category than larger rivals Diageo and Pernod and could be more susceptible to volume swings, should demand soften for its core American whiskey products.
• The proliferation of craft distillers might pose some threat by offering an alternative to spirits consumers in search of new fare.
• Short supply and price inflation of key agricultural ingredients (agave) and packaging materials (glass) may disrupt Brown-Forman’s operations.

This article was compiled by Susan Dziubinski and Sylvia Hauser.