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Altria Lights Up On Earnings Beat

Published February 2nd, 2017 by Bob Ciura

2016 was another spectacular year for Altria (MO). The tobacco giant delivered a total shareholder return of 20.5%, which was the fourth year in a row of total shareholder returns above 20%.

Plus, Altria is a dividend growth investor’s dream stock. It is a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.

You can see the full Dividend Achievers List here.

But actually, Altria’s dividend history is far more impressive than that. It has delivered 50 dividend increases in the past 47 years.

Were it not for various spin-offs over the years, which technically reduced Altria’s dividend, it would be a Dividend Aristocrat.

Altria’s amazing share price and dividend returns are fueled by its highly profitable business model, dominant brand positioning, and strong free cash flow.

The company released fourth-quarter and full-year 2016 financial results on February 1. This article will discuss the results and the company’s future prospects.

Financial Overview

Altria is a consumer staples conglomerate. It has various different product lines, including cigarettes, cigars, chewing tobacco, and wine.

MO Brands

Source: Annual Shareholder Meeting presentation, page 6

Altria generated a massive financial windfall in 2016, when beer giant Anheuser-Busch InBev (BUD) merged with SABMiller plc. Altria had held an approximately 26% stake in SABMiller, and as a result recorded a $13.9 billion gain for its shares.

Altria now has a 9% stake in the combined company, which should continue to add to earnings going forward.

The transaction skewed Altria’s results. Reported earnings-per-share soared 723% to $5.27 in the fourth quarter.

But the company’s core operations are performing strongly as well. Earnings-per-share, as adjusted for one-time items, rose 1.5% to $0.68.

This beat the average analyst estimate, which called for adjusted earnings-per-share of $0.67.

Full-year adjusted earnings-per-share increased 8.2% to $3.03.

In the core smokeable products segment, which constitutes approximately 90% of Altria’s sales and earnings, operating profit rose 5.3% in 2016. This was driven primarily by price increases, and to a lesser extent cost cuts.

Altria also saw strong results in smokeless products and wine. The company’s smokeless tobacco business is spearheaded by the Copenhagen and Skoal brands.

Copenhagen and Skoal are also industry-leading brands. Their collective market share expanded by 400 basis points from 2009-2015.

MO Smokeless

Source: Annual Shareholder Meeting presentation, page 10

The two brands together hold the majority of smokeless category market share. Again, this leads to pricing power for Altria.

Smokeless product segment revenue increased 9.2% in 2016, driven by higher pricing and higher volumes.

Lastly, the wine business includes the Ste. Michelle brand. Altria’s wine business grew revenue by 7.8% in 2016.

Growth Prospects

The U.S. tobacco industry is not exactly a growth story, as smoking rates are in decline. In light of this, Altria is investing in new product development.

The most compelling growth catalyst for Altria is e-vapor products.

MO E-Vapor

Source: 2016 CAGNY Presentation, page 25

E-vapor is a more than $2.5 billion product category by annual sales, and Altria will surely try for a leadership position.

Within its NuMark subsidiary, Altria has expanded its MarkTen e-cigarettes to stores representing about 55% of the e-vapor retail category.

Altria is also active in heated tobacco. It is developing the iQOS product line in the U.S.

MO Heated Tobacco

Source: Annual Shareholder Meeting, page 28

Altria intends to submit an application for iQOS approval to the FDA in the first quarter. Assuming the product gets the go-ahead, the next line of iQOS Heatsticks could hit the U.S. market nationwide in 2017.

Dividend Analysis

One of the best aspects of Altria is its dividend. The company maintains a clear dividend policy, which is to distribute 80% of its annual adjusted earnings-per-share in dividends.

Altria’s current annualized dividend payout is $2.44 per share. This works out to a 3.4% dividend yield based on the company’s recent share price.

The S&P 500 Index, on average, has a 2% dividend yield. As a result, Altria is an attractive stock choice for income investors.

Altria typically increases adjusted earnings-per-share each year in the high-single digit range, and its dividend growth has averaged around this level as well.

Altria expects adjusted earnings-per-share to be in a range of $3.26-$3.32 in 2017. This would represent 7.5%-9.5% growth from 2016, and should be enough to raise the dividend by another 8% or so in 2017.

Competitive Advantages

One of Altria’s biggest strengths is pricing power. It sells an addictive product, and Marlboro commands huge market share in the cigarette industry.

In fact, Marlboro holds a higher market share in the U.S. than the next 10 largest cigarette brands combined.

MO Marlboro

Source: Annual Shareholder Meeting presentation, page 9

Marlboro clocked in number 26 in Fortune’s 2016 list of most valuable brand in the world. According to Fortune, the Marlboro brand is worth $21.9 billion.

And, Altria spends very little on advertising, since cigarette advertising on television and radio is banned in the U.S.

The strength of the Marlboro brand is a major competitive advantage for Altria. The company can consistently raise prices each year, swhich is helping Altria offset the decline in smoking rates.

Altria’s steady profits allow the company to return so much cash to shareholders. Since the beginning of 2011, Altria returned over $28 billion to shareholders through dividends and share repurchases.

Altria paid $4.5 billion of dividends last year.

Plus, Altria utilized $1 billion for share repurchases in 2016. It has $1.9 billion left in its current share repurchase program.

Final Thoughts

Altria is one of the most highly-regarded dividend growth stocks, and for good reason. The company has raised its dividend consistently for nearly five decades.

And, the stock has an attractive dividend yield.

Going forward, Altria faces some significant challenges that it will have to contend with. Falling smoking rates pose a risk, and the company’s earnings growth slowed to 1.5% in the fourth quarter.

Still, Altria should have little trouble generating enough earnings growth to keep raising its dividend. The company has plenty of levers left to pull—including price increases, cost cuts, and share repurchases—so that it can continue increasing the dividend.

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