FEMSA Forward - Focused Leadership in Retail, Beverages & Digital

Rhea-AI Summary

FEMSA announces a revamped capital allocation strategy to enhance long-term intrinsic per-share value. Plans include significant investments in core growth initiatives, with a focus on Mexico, alongside returning capital to shareholders. The strategy aims to prioritize organic investments, inorganic opportunities meeting strict financial criteria, and a capital return framework targeting approximately six percent of FEMSA's market value over the next few years.

Insights

Financial Analyst

FEMSA's announcement of a revamped capital allocation strategy is a significant indicator of the company's commitment to shareholder value and financial prudence. The focus on organic growth initiatives, particularly the substantial investment in Mexico, suggests a strategic move to consolidate and expand its market presence in its core business areas. The planned capital expenditure of Ps. 237,000 million underlines the company's confidence in its business model and its growth prospects in the region.

The decision to prioritize investments generating returns above the cost of capital while maintaining a relatively low level of risk reflects a disciplined approach to growth that is likely to be well-received by investors. This is particularly true given the current market environment where investors are increasingly risk-averse. Furthermore, the commitment to a 2x Net Debt/EBITDA ratio underscores a balance between leveraging growth opportunities and maintaining financial stability.

The proposed return of capital to shareholders through increased dividends and an expanded share buyback program could be seen as a signal of strength and an indication that the company believes its stock is undervalued. A 20% increase in dividends and doubling the share buyback capacity can be expected to support the share price in the short term, while also rewarding shareholders directly.

Market Research Analyst

FEMSA's capital allocation revamp is a strategic maneuver that aligns with broader industry trends where companies are increasingly expected to deliver value beyond mere growth metrics. By committing a substantial amount of capital to organic growth within Mexico, FEMSA is not only reinforcing its stronghold as a top employer and taxpayer but also leveraging local market dynamics for potential upside in revenue and market share.

The emphasis on organic investments and inorganic investments with strict financial criteria suggests a focus on sustainable growth and operational efficiency. This could potentially improve FEMSA's competitive positioning and market share in the beverage and retail sectors. The delineation of capital return initiatives, including a detailed dividend payment plan and an enhanced share buyback program, is indicative of a proactive approach to capital management that is likely to resonate with both current and potential investors.

By articulating a clear medium-term capital allocation strategy, FEMSA is providing transparency that can help reduce investor uncertainty, which is particularly valuable in volatile market conditions. This level of clarity and strategic direction can be a differentiator in attracting investment, especially from institutional investors who value governance and strategic foresight.

Economist

The macroeconomic implications of FEMSA's capital allocation strategy are noteworthy. The significant investment in Mexico's economy, with expectations to pay over Ps. 100,000 million in income taxes, illustrates the company's role in economic development and fiscal contribution. This can have a multiplier effect, potentially stimulating further economic activity and employment within the country.

The strategic focus on maintaining a prudent leverage ratio while returning capital to shareholders suggests a balanced approach to capital management that aligns with broader economic stability objectives. Moreover, the company's approach to not maintaining idle capital and maximizing per-share value accretion is indicative of an efficient capital market hypothesis, where capital is allocated to its most productive use.

However, the decision to return capital to shareholders through dividends and share buybacks, rather than reinvesting it entirely into the business or pursuing aggressive expansion, might raise questions about the company's long-term growth opportunities and the broader economic environment. It is essential to consider whether this reflects a lack of viable investment opportunities or a strategic choice to reward shareholders in the face of uncertain economic conditions.

Advancing FEMSA Forward: Revamping capital allocation strategy to drive long-term intrinsic per-share value

MONTERREY, Mexico, Feb. 15, 2024 (GLOBE NEWSWIRE) --  Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA” or the “Company”) (NYSE: FMX; BMV: FEMSAUBD, FEMSAUB) is providing additional information regarding its future capital allocation plans. These plans have been approved by the Board of Directors of FEMSA and are an integral part of, and fully consistent with, the FEMSA Forward strategy presented in February of 2023.

Our capital allocation strategy is focused on driving our long-term intrinsic per-share value. We believe we have abundant attractive capital deployment opportunities. Over the next five years we expect to invest capital in core organic growth initiatives in excess of Ps. 237,000 million, with close to Ps. 170,000 million of that deployed in Mexico, where we are one of the largest employers (over 280,000 employees), and taxpayers, expecting to pay over Ps. 100,000 million in aggregate income taxes for the period between fiscal 2023 and 2028. Considering the remarkable speed and success with which the FEMSA Forward-related divestments have been executed, and after accounting for our expected organic and inorganic capital needs, we believe that returning capital to shareholders should be an important part of the overall strategy.

Capital allocation strategy overview and parameters
As we look at the portfolio of investment opportunities available to us, we will privilege organic investments within our proven business models that can generate returns well in excess our cost of capital, and with a relatively low level of risk. We will also favor investments in initiatives and capabilities with attractive risk-reward profiles that create and drive, through market expansion and innovation, future value creation opportunities. In addition, inorganic investments will be focused on meeting the strategic objectives of our core verticals and scrutinized to meet strict financial criteria: value creation and cash flow generation.

Furthermore, subject to business performance and capital deployment opportunities and beyond our ordinary dividend, we will endeavor to return to shareholders an aggregate amount equivalent to approximately six percent of FEMSA’s current public market value over the next two to three years, through a combination of additional dividends and share buybacks. This capital return framework will have the overarching tenet of not maintaining idle capital on the balance sheet, and maximizing per-share value accretion as we strive to reach and maintain a 2x Net Debt/EBITDA ex-KOF¹ objective.

Return of capital initiatives for 2024
FEMSA expects to use a combination of dividends and a multi-year share buyback program to return capital to its shareholders in 2024 and beyond. To this end, the Board of Directors has approved to submit to the 2024 Annual Shareholders Meeting the following proposals: i) Increase our ordinary dividends by approximately 20% compared to 2023 on an aggregate basis by paying four quarterly installments of Ps. 0.9161 per FEMSAUB unit and Ps. 1.0993 per FEMSAUBD unit (Ps. 10.9931 per ADS); ii) pay an additional dividend in four quarterly installments of Ps. 0.6418 per FEMSAUB unit and Ps. 0.7701 per FEMSAUBD unit (Ps. 7.7010 per ADS), over and above the approved ordinary dividends, to be disbursed on the same dates as the ordinary dividends; and iii) double our maximum share buyback capacity from the currently existing authorization.  

Medium-term capital allocation considerations
Consistent with our plans described above, it is our intention to utilize a mix of the share buyback program and additional dividends as needed.   We intend to continue to use these mechanisms in the medium term, focused on per-share value accretion and maintaining our stated leverage objective.

About FEMSA
FEMSA is a company that creates economic and social value through companies and institutions and strives to be the best employer and neighbor to the communities in which it operates. Across its business units, FEMSA has more than 350,000 employees in 18 countries. FEMSA is a member of the Dow Jones Sustainability MILA Pacific Alliance, the FTSE4Good Emerging Index and the Mexican Stock Exchange Sustainability Index: S&P/BMV Total México ESG, among other indexes that evaluate its sustainability performance.

¹ Net Debt / EBITDA ex-KOF: (Total Financial Debt ex-KOF + Lease Liabilities ex-KOF – Total Cash ex-KOF) / (FEMSA Retail businesses EBITDA + dividends received from Coca-Cola FEMSA).

FAQ

What is FEMSA's ticker symbol?

FEMSA's ticker symbol is FMX.

What is FEMSA's capital allocation strategy focused on?

FEMSA's capital allocation strategy is focused on driving long-term intrinsic per-share value.

How much does FEMSA plan to invest in core organic growth initiatives over the next five years?

FEMSA plans to invest over Ps. 237,000 million in core organic growth initiatives over the next five years.

What is the expected capital deployment in Mexico by FEMSA?

FEMSA expects to deploy close to Ps. 170,000 million in Mexico over the next five years.

What is the target for returning capital to shareholders in the next two to three years?

FEMSA aims to return an aggregate amount equivalent to approximately six percent of its current public market value to shareholders over the next two to three years.