KPI'S at the Top

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Morningstar is initiating credit coverage of Anheuser-Busch InBev BUD with a credit rating of BBB+. The integration of Anheuser-Busch is substantially complete, and the firm has captured the preponderance of the synergies it expected to achieve. Since leveraging the balance sheet of the combined entity when InBev purchased Anheuser-Busch, ABInBev has done an admirable job of selling noncore assets and using free cash flow to repay debt. The firm has pledged to reduce net debt leverage to 2 times, and we project it will reach this goal by the end of 2012. This pledge is supported by the firm's incentive program, in which part of management's compensation is determined by reaching certain leverage targets. As of fiscal 2010, leverage has declined to 3.3 times, the debt/capital ratio has declined to 0.56, and EBITDA covered interest expense by 3.7 times


We believe the firm has a wide economic moat driven by its scale, distribution expertise, and relationships. As the largest brewer in the world with dominant market shares in most of the markets it serves, ABInBev will generate mid-double-digit returns on invested capital (excluding goodwill), in our view, well in excess of its weighted cost of capital. Its success has been driven by its management team, which has instilled a corporate culture of relentless cost cutting, a drive to increase shareholder value, and a desire to outperform the competition.

We expect the company will continue to use its free cash flow to reduce debt until it reaches its leverage goal, at which point we forecast ABInBev will increase its dividend payout ratio. The firm is not currently buying back shares, and we do not expect any repurchases until its leverage target has been met. While we don't expect any significant brand acquisitions in the near term, the firm may use some cash flow to make smaller, tuck-in acquisitions such as recently acquired craft brewer Goose Island.