Valuing a company, when interest rates are negative: Heineken in February 2021

The setting: In February 2021, the German 10-year Euro bond was trading at an interest rate of -0.38%, and the Euro was one of four currencies with negative interest rates. Many analysts viewed these rates as not only unnatural but impossible to work with in valuation, arguing that using these rates would lead to discount rates that were too low and valuations that were too high. Following through, they replaced these actual rates with normalized values that were positive (and made them feel more comfortable).

The company: Heineken is a Dutch company with a long and successful history. Sustained by a globally recognized brand name, it has had a long history of profitability (high margins and hight returns). In recent years, though, their splintered competition has consolidated into one company, AB Inbev, with clear global dominance and that seems to have cut into Heineken’s growth and profitability:

Note that margins and growth rates have dropped over the last decade. The company is still healthy but growing much more slowly, and there is no clear reason why either growth or margins will revert back to historic levels.


In 2020: The COVID effect is clearly visible in 2020, as the company's revenues dropped almost 18% and margins decreased as well. Notwithstanding these shocks, the company still reported a profit for the year.


My story: My story for Heineken is a boring one. After a year of recovery growth, where margins will bounce back, I assumethat growth will continue to stay low, partly because the company’s best growth is behind them and partly because their biggest market (Europe) is in a long term low or even negative growth cycle. Since my valuation is in Euros, there will be no inflation updraft pushing up growth. The deflationary currency and increased competition will lower margins, albeit very gradually over time.

My valuation: My valuation reflects my story and it is captured in the picture below:

Note that in stable growth, I am giving Heineken a negative growth rate in perpetuity, with assets shrinking over time. My final valuation of Heineken is about 20% below the stock price and it reflects how the negative interest rate effect plays out in valuation.

·      On the plus side, it keeps my discount rates low, with Heineken’s cost of capital at 3.76% and allows them to raise both equity and debt at really low rates.

·      On the minus side, it is keeping growth low, now and in perpetuity, and may contribute to declining margins over time.

The net effect, at least for Heineken, is that value stays low, much lower than the stock price.