This U.S.-based company gets most of its profits from the sale of cigarettes, although it also sells smokeless tobacco and wine, and has a stake in a major brewery.
With cigarette sales decreasing, the company is diversifying with two major deals. One is with a leading U.S. maker of e-cigarettes and the other is with a Canadian producer of medical and recreational cannabis. This stock’s earnings continue to rise despite lower sales and stricter regulations for cigarettes. Its dividend yields a high 6.5% and appears sustainable. However, the company will need growth from its new ventures to offset stalled demand for its core product.
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Altria Group Inc., $49.14, symbol MO on New York (Shares outstanding: 1.9 billion; Market cap: $92.8 billion; www.altria.com), is a U.S.-based holding company that operates in three main areas:
Smokeable products (cigarettes and cigars) supplied roughly 86% of Altria’s operating profits in 2017. This business includes Philip Morris, the largest cigarette maker in the U.S., with well-known brands such as Marlboro, Benson & Hedges, Merit, Virginia; Nat Sherman (premium cigarettes) and Middleton cigars.
Smokeless products, such as chewing tobacco, supplied 13% of overall earnings. Its top brands include Copenhagen, Skoal, Red Seal and Husky. Altria sells these products mainly in the U.S.
Wine (1%). This business operates wineries in Washington State and California, and distributes wines from foreign suppliers. Top brands include Chateau Ste. Michelle, Columbia Crest and 14 Hands.
Altria also has a 10.1% stake in Anheuser-Busch InBev (New York symbol BUD), the world’s largest brewer of beer. As of September 30, 2018, that investment was worth $17.2 billion, or 18% of Altria’s market cap.
The company’s sales rose just 4.5% in the past five years, from $24.5 billion in 2013 to $25.6 billion in 2017. The modest growth is mainly due to declining smoking rates in the U.S. and other developed countries. However, higher cigarette prices have helped offset the lower volumes.
As well, Altria continues to do a good job controlling its costs. Due to legal restrictions, it also spends less and less on marketing. As a result, the company’s overall earnings jumped 43.8% during those years, from $4.5 billion in 2013 to $6.5 billion in 2017. Due to fewer shares outstanding, earnings per share gained 50.0%, from $2.26 to $3.39.
In the quarter ended September 30, 2018, Altria’s revenue rose 1.6%, to $6.84 billion from $6.73 billion a year earlier. Thanks to the recent U.S. corporate tax cuts, its earnings improved 18.5%, to $2.04 billion from $1.72 billion; per-share earnings gained 20.0%, to $1.08 from $0.90.
Altria recently announced two major investments that it hopes will cut its reliance on slowing cigarette sales.
The company has agreed to acquire a 35% stake in JUUL Labs Inc. for $12.8 billion. Privately held JUUL is a leading maker of e-cigarettes—electronic devices that heat various substances (in some cases, including nicotine) into a vapour that can be inhaled. Many consumers consider them safer than regular cigarettes, which is why demand for e-cigarettes has soared in the past few years. JUUL has about 75% of the U.S. e-cigarette market.
Due to their popularity with teenagers, the U.S. Food and Drug Administration recently announced new rules that would ban e-cigarettes from most convenience stores and gas stations and impose tougher age verification controls for online sales. Altria feels its expertise in dealing with increasingly tough rules on regular cigarettes will help JUUL overcome those restrictions.
In addition to e-cigarettes, Altria is looking to marijuana for future growth. It will pay $2.4 billion for a 45% stake in Cronos Group, symbol CRON on Toronto, a Canadian producer of medical and recreational cannabis. The company will also get warrants that will give it the option to increase its stake in Cronos to 55%.
The deal puts Altria in a strong position to profit as more U.S. states legalize cannabis use. As well, its expertise with tobacco products should help improve the quality of Cronos’ products. This could involve making pre-rolled cannabis products with consistent tastes and effects.
As well, as one of the largest companies in the adult consumer products area, Altria can help Cronos navigate the extensive regulatory hurdles it faces. The company’s network of farm partners also has the potential to help Cronos develop outdoor cultivation in parts of the U.S. where that’s legal.
Altria held cash of just $2.4 billion as of September 30, 2018, so it will have to borrow the funds it needs for these investments. However, its long-term debt of $11.9 billion is a low 13% of its market cap, so it has room to take on more debt.
The company’s earnings will likely rise from the forecast $4.00 a share for 2018 to $4.32 for 2019. The stock trades at just 11.4 times the 2019 estimate. That low p/e reflects investor concerns around falling tobacco use and increasingly stringent regulations. For example, the FDA now plans to ban menthol cigarettes. Adding menthol helps mask the flavour of tobacco smoke and reduces throat irritation. Menthol cigarettes account for 35% of the U.S. tobacco market.
Altria recently increased its quarterly dividend by 14.3%, to $0.80 a share from $0.70. The new annual rate of $3.20 yields a high 6.5%, and appears sustainable. However, that depends on the shrinkage it faces in its core tobacco business, and the degree of success it achieves in its new growth-oriented areas.
Altria Group is okay to hold for investors who are willing to take on some risk in pursuit of current high income.
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