This “Forgotten” Dividend Aristocrat Is 25% Undervalued and Effectively Yields More Than a Treasury Bond

The market is starting to flood back into defensive and Dividend Aristocrat stocks before the economic pendulum swings the other way. The good news is that you’d still be ahead of the herd if you accumulate stocks like Brown-Forman (NYSE:BF.A, NYSE:BF.B). You probably haven’t heard of that name in a long time.

Brown-Forman is the largest American-owned global spirits company. It sells whiskey, bourbon, tequila, rum, gin, and more. Its crown jewel is Jack Daniel’s Tennessee Whiskey, one of the most recognizable spirit brands on the planet, but the portfolio also includes Woodford Reserve, Old Forester, Herradura, el Jimador, Diplomático Rum, Gin Mare, and GlenDronach Scotch.

You’re looking at a company commanding an estimated 34% of the total U.S. Whiskey & Bourbon Distilleries industry revenue.

The lengthy maturation process for aged whiskey creates a massive barrier to entry for competitors, and Brown-Forman controls its entire value chain from production to distribution.

The best time to accumulate is now

The stock is off by 64% from its 2020 peak and is showing signs of bottoming out.

But why did it decline in the first place?

The single biggest factor is that Brown-Forman was absurdly overvalued heading into 2020. The stock traded at nosebleed multiples that priced in perpetual premium growth, and when reality didn’t cooperate, gravity took over. From there, a cascade of problems hit. Demand weakened, and tariff chaos made it even worse, along with other overlapping problems like GLP-1 and the trend of consumers trading up to higher-end spirits.

However, in 2026, BF-B stock is now too undervalued. Investors who sold earlier have yet to look back. I see an opportunity in the meantime. You’re paying just 17 times earnings for this stock. Historically, the median price-earnings ratio has been 34 times.

Things are yet to turn rosy

I will admit that the 3-year revenue growth rate has been anemic at less than 1% annually. The 3-year free cash flow growth rate is even worse at -18.1% annually. High CapEx and a high-interest-rate environment pressured cash flow. Net interest losses were at $105 million last year.

I do believe that the worst is behind us.

The business has gotten considerably leaner.

Here’s what Brown-Forman reported for FY 2024.

Here’s last year.

Notice how the business managed to generate significantly higher free cash flow despite a decrease in operating cash flow. This was possible due to CapEx finally starting to come down.

I believe a lot more progress is possible on this front. In FY 2019, for example, CapEx was just $121 million, and the company managed to post $679 million in FCF from just $800 million in operating cash flow. This wasn’t a one-off and was the case before 2022.

Starting in 2023, the business started taking on excessive bloat, with debt servicing making it worse.

I see upside ahead, plus the dividends

The business right now is in a stable state, albeit stagnant. Yes, it is no longer in its growth phase, but it is churning out profits with a 21% net margin. The historical net margin is near 23%.

What needs to be worked on is the growth and the bloat. The latter is being taken care of, and I expect growth to slowly return as interest rate cuts come and tariff ripples stabilize.

I see at least a 25-30% upside potential from here by next year. This is because the valuation is low, and the stock could easily trade at over 25 times earnings once dividend stocks become sexier.

A 25x earnings premium on top of earnings estimates gives us a price above $40.

My rationale for an increase in Brown-Forman’s price isn’t coming just from sensing the market’s “vibe”. The dividend yield of just 3% is not something an investor is going to find interesting when Treasuries yield ~4% on average. But as interest rates come down, so will Treasury yields. This business will get a growth boost, and investors will re-evaluate the dividend yield’s worth much higher.

And the icing on the cake is that the dividends have a lot of growth left. This company spends 49% of its earnings on dividends. It also does share buybacks, which have pushed the shareholder yield to an effective 6.58%. With a 42-year streak of increasing dividends, it’s impressive that there’s still massive room left for more increases.