Why Constellation Brands Stock Could Be a Top Value Pick Heading Into 2026
Key Points
Constellation Brands holds a strong portfolio of popular beer brands, including Corona, Modelo, and Pacifico.
Despite lower sales, the company continues to generate ample free cash flow to fund its dividend payments.
The stock could double in value by returning its previous price-to-free-cash-flow multiple.
Constellation Brands (NYSE: STZ) owns a strong portfolio of beer brands, which the market is significantly undervaluing due to recent softness in consumer spending. The stock is down 35% year to date.
This is a rare opportunity to purchase the stock at a high dividend yield and low multiple of free cash flow. Here's what is pressuring sales in the near term, and why it doesn't reflect the long-term value of the company's brands.
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Top beer brands are gaining market share
The company reported a 15% year-over-year decline in sales last quarter; however, some of this decline is attributed to the sale of assets in the wine and spirits business. The beer segment is the company's most significant business, accounting for 94% of total net sales. On an adjusted basis, the segment's sales decreased by 7% year over year in the recent quarter.
Imported beer is playing a bigger role in the U.S. market. The Beer Institute says that nearly 18% of all beer consumed in the U.S. is imported. This trend benefits Constellation's beverage portfolio, which includes some of the most popular imported beers in the U.S., such as Corona, Modelo, and Pacifico. It licenses the right to market and distribute these brands, which provides the company with a competitive advantage.
The recent sales pressure was linked by the company to some customers being more cautious with spending. However, this means Constellation not experiencing a permanent decline in its brand positioning, but rather a temporary sales dip due to socioeconomic headwinds.
This sets up a catalyst next year when the year-over-year sales comparisons are more favorable. Management believes the company remains well positioned for long-term growth, as evidenced by its recent market share performance. Its top beer brands notched dollar share gains in the U.S. market last quarter, with Modelo Especial holding the No. 1 spot in dollar sales.
The stock offers a high dividend yield
Despite lower sales, the business generated $634 million of free cash flow in the last quarter and more than $1.8 billion on a trailing-12-month basis. This means investors can currently buy the stock at an attractive price-to-free-cash-flow multiple of 13.8. This is below its previous five-year average multiple of 25. The stock could double in value by simply returning to the free-cash-flow multiple that investors were willing to pay a year ago.
The value of the stock is further supported by its dividend. Constellation paid just 39% of its free cash flow in dividends over the last year, with the current quarterly payment at $1.02. The drop in the stock has brought the forward dividend yield up to 2.88% -- more than double the S&P 500 average.
The cyclical downturn is offering investors a great buying opportunity. Investors typically don't get the chance to invest in a company of this quality at this valuation when sales are growing. The near-term uncertainty is creating a rare opportunity to buy one of the best beer stocks at a bargain price.
John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.