For many income investors, dividend cuts are the worst outcome when investing in the stock market. A company that cuts its dividend not only means shareholders receive less income, but a dividend reduction is usually accompanied by a drop in the share price.

But in some cases, stocks that cut their dividends can also enjoy a strong recovery, if the dividend cut represents the bottom for the company and its share price. Anheuser-Busch InBev (BUD) recently cut its dividend, and the stock has declined approximately 36% year-to-date. But AB-InBev remains a global leader in its industry, with durable competitive advantages and a huge portfolio of billion-dollar brands.

And, AB-InBev is in the middle of a turnaround which could lead to a return to future growth. In the meantime, the stock appears to be undervalued, with a dividend yield above 3%. As a result, AB-InBev is a turnaround stock that value and investors should take a closer look at.

BUD Falls Flat

Anheuser-Busch InBev SA/NV is the largest beer brewer in the world. The company was formed in 2008 by the merger of InBev and Anheuser-Busch and is majority-owned by 3G Capital. In 2016, the company acquired SABMiller. Today, AB-InBev produces, markets and sells over 500 different beer brands around the world. Major global brands include Budweiser, Stella Artois, and Corona.

The past year has been extremely challenging for AB-InBev. After the huge acquisitions of SABMiller and Grupo Modelo, AB-InBev became saddled with a huge level of debt. To pay down debt, the company had to raise as much cash as possible, which included a significant reduction in the company’s dividend payment to shareholders.

If that weren’t bad enough, AB-InBev has had to deal with the coronavirus crisis. Stay-at-home orders and lockdowns in multiple cities and states across the U.S. dealt a severe blow to the company’s businesses as it pertains to restaurants, bars, stadiums, and other venues. In the first quarter, total revenue declined 6% from the same quarter last year. The decline was due to a 10.5% decline in beer volume, a 0.2% decline in non-beer volumes, and a 9.2% decline in third-party products. Making matters worse is that AB-InBev swung to a loss of $1.13 per share.

Despite its troubles over the past year, AB-InBev possesses numerous competitive advantages. The company still generates a great deal of cash flow and has pricing power, thanks to its brand strength. The company has ~70% market share in Brazil and ~50% market share in the United States. Such high brand loyalty allows the company to raise prices gradually over time. AB-InBev is also a high cash flow generator, due to its global scale. In 2019, revenue was ~$52 billion. Its economies of scale result in lower costs and higher margins than smaller beer manufacturers.

Attractive Stock For Value And Income

AB-InBev is working to cut costs and pay down debt. While this is generally a painful process, investors have the opportunity to buy the stock at a discounted valuation. BUD shares trade for a 2020 price-to-earnings ratio of approximately 15, which could be viewed as too low for a stable large-cap stock with strong cash flow and a dividend yield above 3%.

By comparison, the S&P 500 Index has an average P/E ratio of 23 and an average dividend yield below 2%. Therefore, AB-InBev is a global leader in the beer industry with a durable competitive advantage and long-term growth potential, while offering greater value and dividend income than the broader market index. As a result, we view AB-InBev as our top beer stock to buy right now.