Constellation Brands Lacks a Guiding Spirit

Year-to-date shares Constellation Brands are up nearly 22% from early January lows. But as we saw from Anheuser-Busch's September quarter results, the beer market remains a challenged one, as consumers continue to shift their preferences to spirits and wine. Constellation Brands -- a spirits, wine and beer company -- acquired its beer business, which includes the Corona and Modelo brands, in 2013. Beer has grown to account for more than 60% of the company's revenue stream. The balance of its revenue mix is wine, which is just over 30% of revenue, and spirits at just under 5%. Constellation's business has historically led it to be grouped into what some call sin stocks that also include gaming, and tobacco. I see its business more in line with my Guilty Pleasure investing theme, which also includes gaming as well as chocolate, candy and coffee. As they say, perspective is everything. But I digress... The nature of these Guilty Pleasure businesses is that people tend to buy them no matter what the economic environment. They may trade up and down quality levels and price points, depending on the state of the economy, but they still tend be buyers. And while that will likely be the case, yet again, there are other reasons to think Constellation's business could see some headwinds, particularly for its wine business. The current wildfires in California have led to a state of emergency, and blazes in Northern California are threatening top vineyards. Already two vineyards were destroyed over the weekend and officials ordered evacuations for most of Sonoma County. And with the National Weather Service forecasting a historic wind event that could lead to erratic fire behavior, there could be additional damage. In addition to that unknown, we also have the current trade dispute between the U.S. and Eurozone that led to the U.S. slapping tariffs on $7.5 billion on imports from the European Union earlier this month. The imposition includes 10% tariffs on aircraft and 25% on other goods, including fine Italian cheeses and French wines. Putting these two events together likely means Constellation runs the risk of either higher prices on its wine business, which could eat into margins, or it may have to boost prices, but that could shrink the potential pool of customers. Add in the shifting consumer preference to spirits from beer, and about 95% of Constellation's business is could be vulnerable. That could pose a problem for growth-seeking investors, but for dividend investors it could present a potential buying opportunity at the right time. Over the last four years, the company has boosted its quarterly dividend, which now sits at 75 cents per share up from 31 cents in 2015. In tracing the ups and downs of Constellation's share price over the last four years, we see they have topped out at an average dividend yield near 1.1% and bottomed out near an average dividend yield around 1.7%. Based on the company's current annualized dividend of $3 per share, those figures translate into the upside near $255 per share and potential downside to $180 per share. We're also approaching the time of year when Constellation has increased its quarterly dividend. Exiting its August quarter, the company had $81 million on hand, which is woefully short of the $223 million it would need to pay out if it kept its 30-cent per share quarterly dividend intact. And yes, that amount would be higher if the company continued to boost its dividend. Here's the thing, historically Constellation has funded its dividend from operating cash flow, but there are reasons to think $1.3 billion to $1.4 billion in operating cash generated during the last two years could be something less. Over the coming weeks, we're likely to have a far better sense as to the impact of the California wildfires on Constellation's business as well as the potential duration of U.S. tariffs on European goods. Depending on what we learn, it could be a time to engage with the shares or remain on the sidelines until the impact of these two events are fully reflected in the shares. Given the company's fiscal year that ends in February, it means the company's next quarterly earnings report won't be had until early January. This means we'll either have to look for a company announcement on the impact or for a management team presentation at an upcoming investor conference soon after the current earnings season winds down.

Constellation Brands Lacks a Guiding Spirit

Those looking for dividends from STZ should be cautious as consumers swap out beer for wine and distilled drinks, fires rage in California and tariffs hit European imports.

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