What's Up With BUD - can someone explain this?

[Sarge85]

Can you explain this to me about BUD

Could be something – most likely it’s nothing.

BUDweiser has a shrinking Book Value. As I understand it Book Value is simply Shareholder Equity divided by Total Outstanding Shares.

A look at the balance sheet and 10 year summary shows that the book value figure is decreasing, not from more shares be outstanding, (actually they have been reducing) – but rather a real reduction in Shareholder Equity. Going back to 1995 there has been a steady decrease in book value.

From Valueline:

BUD Book Value/ Share EPS

1995 4.36 .95
1996 4.05 1.11
1997 4.15 1.18
1998 4.43 1.27
1999 4.33 1.47
2000 4.60 1.69
2001 3.62 1.89
2002 3.65 2.20
2003 3.35 2.48
2004 3.43 2.77

Intuitively this seems backwards. Conventional wisdom, and basic mathematics would suggest that as the Book Value decreases, EPS is going to shrink.

EPS = Book Value times Return on Equity

Book Value has decreased at a compounding rate of -2.63%
EPS has increased at an attractive 12.63% over this period.
Sales have only increased 4.17% over said period.

Obviously BUD’s ROE must be high – it is. Over the last three years it has been 60.3%, 74% and 80.8%.

At one point will this increasing ROE be unsustainable? How can a company shrink its equity, but increase EPS more than 3 times that what it is increasing in sales?

Am I comparing apples to oranges?

Sarge[img]/images/graemlins/diamond.gif[/img]

[DesertCat]

My guess is share buybacks or possibly high dividends. If BUD spends more money buying back shares or paying dividends than it earns, it gets the extra money from it's assets (or borrows it, increasing liabilities). Both shrink book value.

If earnings continue to rise, BUD earns more on a smaller equity base, driving ROE through the roof. This can be very good for shareholders as long as they don't borrow too much and overleverage the company.

[buffett]

Cat said "as long as they don't borrow too much and overleverage the company." That's exactly what BUD has been doing over the last 10 years or so*. Here's a fun exercise with BUD. Compute ROE for each of the last 10 years. Neat, huh? Looks like an internet company, right? Now compute ROIC for the same period. It's still great, but it sure didn't grow very much like ROE did.
-web

* Why? My theory: to turn a single digit earnings growth story into double digit EPS growth. Gilding the lily for Wall Street's growth crowd. Happened for umpteen consecutive quarters until very recently. Reminds me of that famous law that says, "Things that can't go on forever, don't."

[buffett]

I now realize that I didn't answer your question, which was more mechanical than philosophical than I at first realized.....actually, you kind of answered it yourself:

BUD has been issuing debt to buy back stock.

Look at each component of book value:

Common Stock and Capital Surplus stay roughly flat, as they should since BUD hasn't issued much new stock.
Retained Earnings grows, as it should since (earnings - dividends) is positive.
Treasury Stock shrinks, as it should since they've been buying back stock like crazy.

Usually overall book value for BUD shrinks each year approximately by the difference between growth in retained earnings and shrinkage of treasury stock.
-web

[Sarge85]

[ QUOTE ]
Now compute ROIC for the same period. It's still great, but it sure didn't grow very much like ROE did.
-web



[/ QUOTE ]

How? - I'm a noob, and I'm not even sure what ROIC is - Return on Invested Capital?

Where would i get invested capital numbers?

Sarge[img]/images/graemlins/diamond.gif[/img]

[AceHigh]

I don't think you understand what book value is:
definition of book value

As assets get older they depreciate, so they lose value. It probably means BUD has older equipment and doesn't replace it very often. Book Value and eps are totally unrelated. In fact a shrinking book value could be very good for company - they haven't had to purchase new equipment for a long time. Seems a brewery could use the same equipment for decades.

[buffett]

[ QUOTE ]
and I'm not even sure what ROIC is - Return on Invested Capital?

Where would i get invested capital numbers?


[/ QUOTE ]

Yep, you got it....return on invested capital. Basically it's like ROE with debt included in the denominator. Really, though, it's much more sophisticated than that. Here's a great intro by the ultra-cool Dale Wettlaufer, now a colleague of the super-chic Mike Mauboussin, director of research for the mega-man Bill Miller.
-web