Warren Buffett hasn’t been buying a lot of stocks of late, but one of the more notable additions to the Berkshire Hathaway portfolio recently has been beer maker Constellation Brands (STZ -0.76%). Berkshire now owns more than 5.6 million shares of the business, worth more than $1 billion.
Constellation owns many top beverage brands, pays a dividend, and also has fairly strong financials. Is this a stock that you should also consider putting in your portfolio?
Why did Buffett buy Constellation Brands?
Investors may learn about the stocks that Berkshire added to its portfolio through its quarterly filings, but it’s not often they learn about the specific reasons behind the moves. But from what investors know about Buffett and his approach to value investing, it may not be a big mystery as to why Constellation may have been an attractive business for him to add this past quarter.
There are many popular, household names within the portfolio that consumers will likely recognize. Berkshire already owns shares of Domino’s Pizza, Coca-Cola, and Kraft Heinz.
Constellation also has many iconic consumer beverage brands in its portfolio, including Modelo and Corona. Having strong brands gives a business a competitive moat that Buffett often looks for when investing in a company for the long haul. It allows it to fend off competitors and do well amid a myriad of economic conditions.
While there have been fluctuations, Constellation has averaged a growth rate of around 4% over the past five years. Buffett values predictability and stability, and Constellation has demonstrated that over the years.
STZ Operating Revenue (Quarterly YoY Growth) data by YCharts
Its financials are also solid, as in the trailing 12 months, the company generated $10.2 billion in sales, earning a profit of $686.3 million along the way. The stock also pays a dividend that yields 2.2% while trading at less than 13 times its expected future earnings (based on analyst expectations), likely adding to its overall attractiveness for Buffett.
Why there could be trouble ahead for Constellation Brands
While Constellation’s fundamentals are encouraging, there are also risks investors should consider before buying the stock.
The first is the impact tariffs could have on the business. Constellation has multiple breweries in Mexico and makes the vast majority of its beer there, including its popular Modelo brand. A lofty 25% tariff on imports from the country would undoubtedly weigh heavily on its financials. The longer that tariffs are in place, the more they’ll impact Constellation’s numbers.
A second factor to consider is the longer-term risk related to alcohol. There’s growing concern about the impact of alcohol on cancer, and that any amount can increase a person’s overall risk of developing cancer. Earlier this year, a report from the surgeon general also called for warning labels to be added on alcoholic beverages.
While the tariff risk may be a short-term one that weighs down the business, the one of greater concern to me is that long-term health risks may lead to a decline in alcohol use in the years ahead, not unlike what has been happening with tobacco over decades.
Why I’d avoid Constellation Brands
Constellation’s business has been doing well of late, but there are challenges ahead that could hinder its short-term and long-term growth, which hasn’t been all that strong anyway. There are better growth stocks to choose from than Constellation, and even its modest yield isn’t all that appealing either; there are high-paying dividend stocks that can make more sense for income-seeking investors.
Investors should always do their own analysis and research before deciding on whether to buy a stock. Berkshire’s portfolio is substantial, and Constellation makes up just 0.4% of it. If it’s a flop, it won’t have much of an impact on Berkshire, which is why you shouldn’t consider buying the stock just because Buffett did.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino’s Pizza. The Motley Fool recommends Constellation Brands and Kraft Heinz. The Motley Fool has a disclosure policy.
