brown forman report

Brown Forman Financial Profile

Sean Vickers, Garrett Gibbins, Brandon Fleischmann, Josh Mercado

Professor Van Horn December 1st, 2016

I have acted with honesty and integrity in producing this work and am unaware of anyone who has not

Vickers, Gibbins, Fleischman, Mercado 2

Part 1 Company Overview

The Brown-Forman Corporation is one of the most successful liquor distribution companies in all of the United States. This corporation is based in Louisville, Kentucky, and has a rich history in providing some of the top name-brand liquors.1 Brown-Forman markets some of the top consumer beverage alcohol brands around including Jack Daniel’s, Early Times, Old Forester, Canadian Mist, Woodford Reserve, and GlenDronach.2 This corporation not only distributes whiskeys, but also many other wines and spirits. In the year 1870, The Brown-Forman Corporation was founded by George Garvin Brown. He was from Louisville, Kentucky and was engaged in the profession of a pharmaceutical salesman.3 Brown was one of the first in his time to be intrigued by selling top-shelf alcohol in fine glass bottles, an idea that gained Brown-Forman imminent prominence.4 Although this corporation primarily resides in the United States, it has done business with Chilean wine producers, and has even acquired Mexican brand Tequila Herradura in 2007.5

It should be noted that Brown-Forman was included in Newsweek magazine as one of the most environmentally friendly corporations in all of America. Brown-Forman was ranked 63rd out of 500 large corporations across America, and was ranked 3rd overall in the liquor industry.6 By not only focusing on short term profits in manufacturing alcohol, but by also insisting in the ideal image of being environmentally friendly, the long run societal image of Brown-Forman lives on. Distributors should understand the importance of taking care of the environment by keeping all facilities and equipment up-to-date, and by being conscious of what they do on a day-to-day basis. Brown Forman exemplifies excellence in every category of the alcoholic beverage industry.

1 https://www.brown-forman.com/about/history/ 1 2 https://www.brown-forman.com/about/history/ 1 3 https://www.brown-forman.com/about/history/ 1 4 https://www.brown-forman.com/about/history/ 1 5 https://www.brown-forman.com/about/history/ 1 6 https://www.brown-forman.com/about/history/ 1


Part 2 Risk and Return

The market risk that we calculated from the 10-k for 2016 was 21.30%. This risk is extremely high, and it is an indication of just how volatile the liquor industry is. It should be noted that the geopolitical environments vary across the world, and no one country is ever the same in the way that they conduct business.7 Although the recession of 2008 impacted the United States negatively, it also had a major impact on the world as a whole.8 According to the Brown-Forman 2016 Annual Report, this recession led to “low consumer confidence, high unemployment, budget deficits, burdensome governmental debt, austerity measures, increased taxes, and weak financial, credit, and housing markets.”9 This recession also led individuals across the world to drink more conservatively at home, rather than going out to restaurants and bars to drink — this led Brown-Forman to suffer directly as a result.10 In addition, there is always the potential for encountering unstable governments abroad, as there is always some form of corruption in emerging nations. Possible forms of corruption may include “expropriation, nationalization, confiscation of assets, problems with repatriation of foreign earnings, economic or trade sanctions, closure of markets to imports, anti-American sentiment, terrorism, health pandemics, and a significant reduction in global travel.”11 In addition to these risks, changes in consumer preferences and the speed at which Brown-Forman can adapt to these changes in preferences would also adversely impact them.12 Domestically, regulations and laws vary per state. For instance, in Louisiana, one can buy liquor 24/7. In Texas, all liquor stores close at 9:00 pm and are not open on Sundays. Also in South Carolina, the state owns all liquor stores, which leads to corporations like Brown-Forman to lose some of control in product promotions. It should also be noted that relative to many other liquor distributors, Brown-Forman is a domestic firm, and is very small. Smaller firms always experience more of a risk than larger firms.

7https://www.brown-forman.com/investors/annual-report/ 8 https://www.brown-forman.com/investors/annual-report/ 9 https://www.brown-forman.com/investors/annual-report/ 10 https://www.brown-forman.com/investors/annual-report/ 11 https://www.brown-forman.com/investors/annual-report/ 12 https://www.brown-forman.com/investors/annual-report/


3 year: (Beta coefficient is .7961)




Published Beta is .7399 - the difference of the published Beta and our calculated Betas could simply be a rounding condition as excel rounds to many numbers. There is not much of a difference between the 3 year and 8 year Betas, compared to the published Beta, however, the calculated Beta for 5 year was substantially lower. Generally, lower Betas mean less risk, so for 5 year there was less risk involved. For 3 and 8 year, the Betas were closely related, so it could just be a rounding error.

=.0158+.7399(.118-.0158) =9.14%


Part 3 Dividends and Earnings

Brown-Forman returns cash to shareholders in two ways: Stock repurchases and dividends. The firm was authorized to buy back up to $250 million worth of their outstanding Class A and Class B common shares from the fiscal year of October 15th, 2014, through October 14th, 2015. On March 25th, 2015, a $1 billion increase to their share repurchase authorization was approved to be completed by March 14th, 2016. On January 28th, 2016, a new $1 billion increase was approved commencing April 1, 2016 through March 31st, 2017. When the current fiscal year ends on April 30th, 2017, the company will have repurchased up to $2,250,000,000 worth of Class A and Class B common shares over the past three years. Brown-Forman hands out dividends every quarter, at least in the last two fiscal years. From the records available to our team, the firm has also paid out dividends consistently on a year-to-year basis. The company has not spun off any assets.

Year Net Income ($)

2008 440 M

2009 435 M

2010 449 M

2011 572 M

2012 513 M

2013 591 M

2014 659 M

2015 684 M

2016 1,067 M

Total Income 5.41 B

After taxes and expenses, Brown-Forman accumulated about $5,410,000,000 from 2008-2016. Over the past three years (2014-2016) Brown-Forman accumulated $2,410,000,000. It must be noted that Brown-Forman offers two classes of common stock, Class A and Class B. While these two stocks have varying share prices, they have the same dividend payout per share. The only difference between these two stocks is that owners of Class A shares have voting rights while the owners of Class B shares do not. For this reason, the shares will be lumped together


throughout the following calculations. The dividend payout data over the same period is as follows:

2014 2015 2016

Shares Outstanding 213,455,000 208,700,000 197,742,000

Multiplied by x x x

Dividend payout per share ($)

1.09 1.21 1.31

Total $ paid out in dividends 232,665,950 252,527,000 259,042,020

The total amount of money paid out as dividends from 2014-2016 is $744,234,970. We figured out the total possible return Brown-Forman could have returned to its shareholders, with a 0% plowback, in the past three years by adding the retained earnings and the dividends paid each year.

2014 2015 2016

Retained Earnings ($) 2,894,000,000 3,300,000,000 4,065,000,000

Total $ paid out as dividends 232,665,950 252,527,000 259,042,020

Total possible return ($) 3,126,665,950 3,552,527,000 4,324,042,020

Therefore, Brown-Forman could have returned $11,003,234,970 to its shareholders over the past three years. Instead they only returned a little over $744 million. We calculated the plowback ratio for each year by first calculating the dividend payout ratio and then subtracting from 1. Dividend payout ratio = $ paid out as dividends/net income (year) 2014 - $232,665,950/$659,000,000 = .35305 = 35.3%, 1-.35305 = .6469 = 64.7% plowback 2015 - $252,527,000/$684,000,000 = .36919 = 36.9%, 1-.36919 = .6308 = 63.1% plowback 2016 - $259,042,020/$1,067,000,000 = .24277 = 24.3%, 1-.24277 = .7572 = 75.7 plowback This data suggests a sizeable decrease in dividend payout for shareholders from 2015 to 2016.


Dividend growth rate

Year Dividend ($) % change (y1/y0-1)*100

2007 .62

2008 .69 11.29%

2009 .75 8.69%

2010 .78 4%

2011 1.49 91.03%

2012 .89 -10.27%

2013 4.98 459.55%

2014 1.09 -78.11%

2015 1.21 11.01%

2016 1.31 8.26%

Total percent increase = 505.45%

505.45/ (Number of years – 1) = average percent increase 505.45/9 = 56.16% The average dividend growth rate is 56.16% In the year 2013, Brown-Forman paid out $4.98 per share in dividends. Compared to the previous year's’ dividend payout of $0.89, this was a 459.55% increase. This year is considered an outlier and to get a more accurate dividend growth rate over this time period, our team removed this year and recalculated. Total percent increase = 45.9 % 45.9/9 = 5.1% The average growth rate (excluding 2013) is 5.1%


Earnings per share growth rate

Year EPS($) % change (y1/y0-1)*100

2007 1.72

2008 1.89 9.88%

2009 1.91 1.06%

2010 2.01 5.24%

2011 2.60 29.35%

2012 2.37 -8.85%

2013 2.75 16.03%

2014 3.06 11.27%

2015 3.21 4.90%

2016 5.22 62.62%

Total percent increase in EPS = 131.5%

131.5 / (Number of years -1) = average percent increase 131.5/9 = 14.61% The average EPS growth rate over the last 10 years is 14.61% In the fiscal year of 2016, Brown-Forman has a growth rate of 62.62%. This increase resulted from a few factors including the sale of Southern Comfort as well as Tuaca (two of BF’s brands), which accounted for $1.76 of the increase. There was also a reduction in the shares outstanding resulting from the ongoing share repurchases. Lastly, there was a decrease in the effective tax rate. Professional estimates of the growth rate were unavailable to our team because they were not published online. The 63% growth rate in 2016 is considered an outlier due to the sale of two of Brown-Forman’s brands, as well as continued stock repurchases. With this being said, we believe that a professional estimate of the growth rate would be significantly lower than that of our calculated average of 14.61%. A lower growth rate would also be expected because our data went back 10 years opposed to 5 years of most professional estimates. Stock repurchases are also coming to a close, and there is no report of Brown-Forman selling any more of their brands.


Part 4 Valuation of the Firm

Brown-Forman Corporation’s current quoted stock price for its B stock is at $46.38. For 2016, dividends paid out for the year were $1.31, and they had a 10-year dividend average growth rate of 5.1%. Since this firm has been around since the late 1800’s, the firm’s growth should be at a constant rate with exception to any key events drive might drive growth up or down. With the necessary values factored in, the current calculated price was at $32.41. Operating cash flow for Brown-Forman was also at $1,123,000,000, up from $735,000,000 the prior year and resulting in a 52.79% growth in OCF. When compared to the stock price posted at the time, there was a $13.94 difference. This stock’s intrinsic value could suggest an interest in the stock and create the difference in prices by overvaluation.13 Applying the dividend discount model to the actual stock price gives a growth rate of 6.32%, differing from the 5.1% that was calculated. One possible reasoning could be from the the dividend anomaly in 2013. $4.98 was paid out, up from $.98 the year prior. That resulted in a 459.55% increase in dividend growth. Brown-Forman is already undertaking measures that would help increase the shareholders’ wealth through the stock repurchase currently in the works. Within the next few months, Brown-Forman will complete the 1 billion-dollar increase in the stock repurchase. They also still payout dividends, also working towards increasing market value.

13http://www.investopedia.com/ask/answers/011215/what-difference-between-intrinsic-value-and-current-market-value.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186


Part 5 Capital Structure Choices

Brown-Forman’s capital structure is currently divided between 49% of debt and 51% of equity. Total value of the capital structure for 2016 is $3,063,000,000. The weighted average of the cost of capital for Brown-Forman was calculated to 10.51%. When compared to the company’s return on invested capital, which was 28.69%, the higher ROIC indicates that Brown-Forman is effectively creating value from its capital structure. Within the alcoholic beverage industry, Brown-Forman does appear to have slightly more risk with a higher weighted average of the cost of capital over two other competing alcoholic brand holders. Molson-Coors and the Boston Beer Company were selected because they both are publicly traded, American-based corporations. All three have portfolios of brands within the alcoholic beverage industry, though it should be noted that Brown-Forman has the largest and most diverse without actually being a producer of any specific one. Molson-Coors had a weighted average of the cost of capital of 8.96%, and the Boston Beer Company had theirs at 8.32%. Those two companies directly compete with each other over beer sales, and could explain the similar weighted average of the cost of capital. Though, the Boston Beer Company is almost completely financed through equity, with debt making up less than one percent. Brown-Forman is a much larger firm than both and carries products that may not always compete in sales with the other two examples.


Part 6 Financial Ratios

Brown-Forman has a strong gross profit margin with a return of .76 cents on every dollar in sales and a net income of .26 cents on each dollar. The profitability of Brown-Forman is strong amongst its competitors in the alcoholic beverage industry and exhibits, on average, a gross profit margin of .3-.4 cents on every dollar and an average net profit margin of .10-.15 cents on every dollar in sales. Brown-Forman also has .9601 cents in debt for every dollar of equity held by shareholders. Compared to its competitors, Brown-Forman is in the middle of the road, with Crimson Wine group having a debt to equity ratio of .26 and New Age Beverage Corp. having a ratio of 2.63. Based on the 2016 annual report calculations, Brown-Forman exhibits a P/E ratio of 15.79, meaning investors can expect to earn a dollar on every $15.79 invested, which runs on average with their competition. Brown-Forman also has a working capital ratio of $2.82 in currents assets in which it can cover each dollar of debt with. With a debt-to- assets ratio of .36, Brown-Forman has a dollar in total assets for every .36 cents in total debt, Brown-Forman exhibits an excellent interest coverage ratio in which it can cover 33.33 time its interest payment. In parallel, Brown-Forman displays a liquid financial standing with a quick ratio of 1.47 where it has $1.47 in assets for every dollar in liabilities. As shown below, other financial ratios for Brown-Forman are listed below with their respective quantities. Based on information found from CSImarket.com, Brown-Forman respectively ranks in the top 3 in all categories in comparison to their competition in the alcoholic beverage industry. Based upon these ratios, it's clear that Brown-Forman is in good financial standing and appeals to their shareholders who have high expectations from one of the top alcohol companies in the world, respectively.

LiquidityRatios CurrentRatio= $2,223,000,000.00 2.8104 $791,000,000.00 QuickRatio= (2223000000-1054000000) 1.4779 $791,000,000.00


LeverageRatios DebttoAssetsRatio= $1,501,000,000.00 0.3588 $4,183,000,000.00 DebttoEquityRatio= $1,501,000,000.00 0.9609 $1,562,000,000.00 FixedChargeCoverage= 1489000000+46000000 33.3696 $46,000,000.00

ActivityRatios InventoryTurnover= $4,011,000,000.00 3.8055 $1,054,000,000.00 TotalAssetTurnover= $4,011,000,000.00 0.9589 $4,183,000,000.00 AccountsReceivableTurnover= $4,011,000,000.00 7.1753 $559,000,000.00

ProfitabilityRatios GrossProfitMargin= $306,600,000.00 0.7644 $4,011,000,000.00 NetProfitMargin= $1,067,000,000.00 0.2660 $4,011,000,000.00 ReturnonTotalAssets= $1,067,000,000.00 0.2551 $4,183,000,000.00 ReturnonEquity= $1,067,000,000.00 0.6831 $1,562,000,000.00


Part 7 Conclusion

Based upon our financial profile, Brown-Forman is an exceptional company that boasts a strong financial portfolio within its respective industry. This company has a long-standing reputation for rewarding shareholders. This conclusion can be derived from Brown-Forman’s consistent growth of dividend payouts to their shareholders and averaging a growth rate of 5.1% over the past 10 years (excluding 2013, in which there was 459% increase in dividend per share). Brown-Forman has also paid a dividend to shareholders for 70 years, and has raised its dividend each year for the past 32 years. With consistent earnings and returns to shareholders, Brown-Forman’s financial profile exhibits strong consideration to be a part of any investment portfolio, especially one centered around diversification due to constant need in the marketplace for alcoholic beverages. Based on our calculations it can be said that Brown-Forman, there was some differences in the stock value that was mentioned previously. Those differences might be linked to unusual dividend activity in 2013. Dividend growth calculations were substantially off when factoring in that year. Our calculations omitted the payout on 2013. Any major changes to help increase shareholders’ wealth should be considered only after the completion of the $1 billion increase in stocks repurchased. They should also continue their dividend payout at 25%. Though they have recently sold two major brands, they should look into pursuing new, growing brands as well. Final thoughts on Brown-Forman focuses on why they offer two different stocks (A & B). Stock A has voting rights attached to it, while stock B does not. Both of these stocks have different share prices. Due to the fact that the stocks are separated, the professional estimates are not as accurate to our data because we lumped both types of stock together for the purpose of our project. This made it difficult to compare published information with our personal calculations. In 2015 Brown-Forman generated $684 million in net income, while in 2016 they generated $1.067 billion. This illustrates that Brown-Forman has recently experienced a large spike in profitability over the past year. Due to the recent success of Brown-Forman, we expect a leveling out of future profits over the next few years. Brown-Forman has made tremendous contributions to the African American, LGBT, and inner-city communities, thus propelling them to securing a good reputation in the eyes of the public. In addition, Brown-Forman is also environmentally friendly. All of these elements are paramount to the success of a corporation, especially in the long run. It is important to understand that in the study of finance, intangible assets, such as a good reputation, matter more to a corporation than do short term profits. By continuing on with an emphasis on social responsibility, Brown Forman is setting itself up for long term success.

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