Warren Buffett's Berkshire Hathaway Doubled Down on Constellation Brands Stock. Time to Buy?
Berkshire Hathaway increased its stake in Constellation Brands by 114%.
A low forward valuation and above-average dividend yield should bolster the stock's value proposition.
Shifting consumer patterns and tariffs could bode poorly for the stock.
10 stocks we like better than Constellation Brands ›
Over the last few quarters, Warren Buffett's Berkshire Hathaway was a net seller of stocks. This was also true of the most recent quarter, as its liquidity rose to $348 billion, up from $335 billion in the previous quarter.
Still, Buffett and his team bought some stocks in Q1, and its fastest-growing position was Constellation Brands (NYSE: STZ). The company increased its stake by 116% and now owns over 12 million shares.
Nonetheless, investors like Buffett buy stocks for many reasons. Knowing that, should average investors follow Berkshire's lead in this Warren Buffett investment or stay on the sidelines?
Berkshire began buying Constellation Brands stock in the fourth quarter of 2024. On the surface, it looks like a "Buffett stock" with relatively low valuation. Another attribute is the fact that Constellation owns the U.S.'s current No. 1 beer brand, Modelo. With other brands such as Corona beer, Robert Mondavi wine, and High West whiskey, it sells products with the enduring demand investors like Warren Buffett often seek.
However, in January, the company reported results for the third quarter of fiscal 2025 (ended Nov. 30, 2024). The misses on net sales and earnings and a $2.25 billion goodwill impairment led to a considerable sell-off in Constellation stock, and it dropped over 17% the day after its announcement. The stock steadily declined further before bottoming in February.
While Buffett's team has not commented directly on its activity with this Constellation stock, it may have taken advantage of the lower stock price to more than double its share count.
Even though the stock is up about 20% from that 52-week low, it trades at a 47 P/E ratio when figuring in the aforementioned goodwill impairment. Buffett's team likely based its valuation on the 15 forward P/E ratio, which makes it appear inexpensive and includes no one-time charges.
Berkshire may also like its dividend. The annual payout of $4.08 per share offers a dividend yield of 2.1%, well above the 1.3% S&P 500 (SNPINDEX: ^GSPC) average.
Constellation Brands generated just over $1.9 billion in free cash flow in fiscal 2025 (ended Feb. 28). The 10 straight years of payout hikes may have baked in an expectation of rising dividends. Additionally, since the dividend cost the company $732 million during the same period, it can probably continue to raise its payout, making it an increasingly attractive income stock.
However, before being so quick to follow Buffett and his team into Constellation Brands, investors should understand its challenges.
For one, there's surprisingly low demand for alcohol among Gen Z. While a variety of factors may explain that decline, it could mean a possible long-term drop in demand for its beverages. Also, softening consumer spending appears to have affected all generations. This could hurt sales as more consumers seek better value.
Furthermore, many of its most popular brands come from foreign countries. This is particularly concerning for Mexican beer Modelo, which only recently became the No. 1 beer after capturing the title from Anheuser-Busch InBev's Bud Light.
In light of its situation, the company believes it will achieve -2% to 1% net sales growth in 2026. For its "medium-term" forecast, the company previously predicted 6% to 8% net sales growth for fiscal 2027 and 2028. Now, with the possible effects of tariffs added, the company revised the net sales increase to the 2% to 4% range, indicating Constellation shareholders might face years of pain.
Under current conditions, Constellation Brands stock looks like a buy for average investors.
Admittedly, worries about tariff effects, consumer sentiment, and demographic trends arguably justified a lower earnings multiple, since sales growth appears it is on track to fall.
Nonetheless, with the company on track to sell at just 15 times earnings, the sell-off in Constellation Brands stock appears overdone. Moreover, with the dividend yield of over 2% and more payout hikes likely coming, investors have the potential to earn significant returns from both stock price growth and income.
Hence, as investors receive more clarity on the tariff front, they may return to this stock, lifting share values over time.
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Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.
Warren Buffett's Berkshire Hathaway Doubled Down on Constellation Brands Stock. Time to Buy? was originally published by The Motley Fool
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