Altria Group Inc (MO)

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Will Altria Stock Be Hammered by Tobacco Products Falloff?
By: 24/7 Wall St. | January 10, 2020

Altria Group Inc. (NYSE: MO) has its roots in a business that is over a century old. Tobacco and cigarettes may not have the market they used to, but there’s still money to be made.

Altria Name Took It Away From Tobacco Scandals

For decades, cigarette manufacturers presented smoking as healthy. Since that was never the case, the industry began to face lawsuits as early as the 1960s. By the 1980s, the suits were piled high enough that cigarette giant Philip Morris was fighting for its life, financially. The issues of public health had created a firestorm the company could no longer escape.

Several lawsuits resulted in hundreds of millions of dollars in judgment against Philip Morris. Its board of directors faced the challenge of keeping the public corporation in business. Another problem was that cigarette sales had begun to drop in the United States, even though they remained healthy overseas.

The Diversification Decision

The board came up with a long-term solution. Philip Morris would use its tremendous cash flow to buy companies via a major M&A strategy. The largest investment it made was in Kraft Foods. That diversified it substantially away from tobacco and allowed it to start a string of operating companies. Altria Group, the new parent, reached the point where it was no longer considered a cigarette stock.

It also took positions in John Middleton, Chateau Ste. Michelle Wine Estates and brewer AB InBev. In the meantime, it spun out its overseas operations into Philip Morris International Inc. (NYSE: PM), while Philip Morris USA stayed with the Altria parent. Oddly, Altria and Philip Morris International may merge again.

Much more recently, Altria took a position in e-cigarette maker Juul Labs. Juul rode the boom in e-cigarettes, which has been largely halted recently because a number of studies show e-cigarettes are nearly as dangerous for health as smoking.

A major study out of Harvard recently confirmed that toxins in e-cigarettes can cause long-term lung damage. Juul has also been hit by a ban on flavored cigarettes. Very recently, the U.S. Food and Drug Administration (FDA) banned the sales of products with cigarette pods.

How Has Altria Shaped Up Financially?

After Altria spun out Kraft to shareholders, it became almost exclusively a cigarette company again. Its revenue comes almost entirely from the United States. Other than its huge domestic cigarette business, it owns several other companies. These include Nat Sherman, U.S. Smokeless Tobacco and Philip Morris Capital. Altria remains the largest American company in the tobacco industry.

Over the past year, Altria’s stock price has been relatively flat, while the S&P 500 has been up 27%. However, many people do not invest in Altria entirely for its share price movement. Altria stock yields $3.36, against a share price of $49.58.

That dividend creates a 6.82% yield, among the highest of any large publicly traded company in the United States. It has become one of America’s best “safe haven” stocks. Its earnings and cash flow mean the dividend is almost certainly safe, and it has a long-term reputation as a dividend stock.

In its most recent quarter, Altria had revenue of $8.6 billion, up 2% from the same period a year ago. Per-share earnings were $1.16, up 10%. The company had $1.6 billion in cash and no debt. Altria also announced a “compounded annual adjusted diluted EPS growth objective of 5% to 8% for the years 2020 through 2022.”

Looking back further, Altria’s top line has changed very little. Revenue in 2016 was $19.3 billion, which rose to $19.6 billion in 2018. Free cash flow last year was $6.8 billion.

Cigarettes and the World

Perhaps the largest challenge Altria has is that the United States is no longer among the largest users of tobacco in the world. That has changed almost completely as the sales of cigarettes in the nation have declined. The United States now ranks 69th in the world in terms of tobacco consumption. That is based on a figure of 1,017 cigarettes consumed per person per year.

In the Chinese market, the world’s largest, the level is 2,043. In 2015, the Centers for Disease Control and Prevention said 15% of Americans smoked daily. That is down from 21% a decade earlier. The biggest existential problem for Altria is that its customers may disappear.

Altria Today

Altria has 8,400 employees now. This is down from two years ago. Cost-cutting took out 800 people. Smokable products make up about 90% of the company’s revenue. The balance is what the company calls smokeless products. A fraction of sales come from wine.

Last year, Altria sold 109,791 million cigarettes. Of these, one out of nine was a Marlboro. The brand continues to be among the most valuable in the world.

In 2019, Chairman and Chief Executive Officer Howard A. Willard III made $11.6 million. That was up from $6.1 million the year before. Chief Financial Officer William F. Gifford Jr. made $7.6 million in 2019. Each member of the board of directors receives a cash retainer of $100,000, in addition to stock awards, each year

Two institutional investors own the largest number of Altria shares. BlackRock holds 7.8%, or 145,628,219 shares. The Vanguard owns 145,483,146, which is also 7.8%

Philip Morris is in essentially the same business it was in 1854, when founder Philip Morris sold his first products, known as the “Philip Morris English Ovals.” In one sense, with all the restructuring, spin-offs of companies and lawsuits, the company has been in the same business since day one.

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