Altria's Strong Dividend And Beer Investment Portend A Bright Future

Jul. 2.14 | About: Altria Group, (MO)


Contrary to perceptions about the declining demand for cigarettes, Altria has a 27% investment in SABMiller worth more than $20 billion.

The strong current yield and dividend coverage ratio make this stock suitable for a variety of investors.

The company has the ability to raise prices in the face of declining demand.

The scope of this article will look at the financial health of Altria (NYSE:MO) and the ability to continue to pay the dividend. The ability to raise prices on Marlboro cigarettes, the investment in SABMiller (OTCPK:SBMRY), and the ability to raise the dividend mandates that dividend growth investors give this stock another look.

How Safe Is The Dividend?

First quarter 2014 cash flow summary ($ in millions):

Q1 2014

Q1 2013

Cash from operations






Cash from asset sales






Shares repurchased



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The company had cash of $3.6 billion at 3/31/14. For the most recent quarter, MO generated $2.1 billion in adjusted free cash flow, or cash from operations minus capex. The dividend coverage ratio is the free cash flow over the dividend, or 2.2x for Q1 2014.

For more comparisons on other large-cap dividend coverage ratios, see this article on AT&T (NYSE:T) or this article on Starbucks (NASDAQ:SBUX). Please note that Starbucks had a dividend coverage ratio of 3.3x for the most recent six months of operations, and I concluded that this dividend would be raised in the next couple months.

Next, let's look at Altria and see how the shareholder's capital is working.

Altria At A Glance

Five years' financial summary:

FYE 13

FYE 12

FYE 11

FYE 10

FYE 09

Net sales (billions)






Operating income (billions)






Earnings (billions)






Dividends per share






Inventories (billions)






Approximate employees






Common shares outstanding at year end (in billions)






Capital expenditures (in millions)






Pre tax profit margin






Eagle-eyed readers will note that inventories have grown by only 6% in the past five years, but operating income is up 47% over five years. The company does not require significant investments in working capital to remain strongly profitable. Also, the company has been able to reduce the workforce by 10% over five years.

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Declining Demand But The Ability To Raise Prices

The company shipped 2.4% fewer Marlboro cigarettes in Q1 2014 compared to Q1 2013. Numerically, that is 24.8 billion cigarettes in the current period compared to 25.4 billion cigarettes in the prior period. Cigarettes are the primary source of operating income, and it is critical to understand the performance of Marlboro in the marketplace.

Currently, Marlboro has a 43.8% share of the US cigarette market. Companywide, MO has a 50.7% share of the US cigarette market. The company offers premium brands, such as Virginia Slims, Parliament and Benson & Hedges, and Discount brands, which include L&M and Basic.

In 2013, Altria raised prices twice. Effective December 1, 2013, Altria increased the list price on its other cigarette brands by $0.07 per pack. Earlier, on June 10, 2013, Altria increased the list price on its cigarette brands by $0.06 per pack.

Beer: The Hidden Gem For MO

SABMiller is second-largest brewer by volume in the world. Currently, it still is the world's second-largest brewer measured by revenues, after Anheuser-Busch InBev (NYSE:BUD).

SABMiller's brands include Fosters, Grolsch, Millerr, Peroni, and Pilsner Urquell. The company has operations in 75 countries and about 70,000 employees across the world. SABMiller also bottles soft drinks for Coca-Cola (NYSE:KO) in Africa and Latin America. As MO owns a 26.8% equity stake, and with SABMiller's market capitalization of about $90 billion, MO shareholders have an investment worth about $24 billion.

Over the past five years, Altria's earnings from its equity investment in SABMiller have grown considerably, from $600 million in 2009 to almost $1 billion in 2013.


I conclude that the MO dividend is safe for 2014 and into 2015, primarily due to the strong market share for Marlboro brand and the hidden gem (the SABMiller investment) on the MO balance sheet. In a sense, an investment in MO is part ownership of a US cigarette company attached to an international beer behemoth. The company is not a one-trick pony.

However, this stock should come with a warning label, just as it's many products do. The company is subject to significant governmental and private sector actions intended to reduce tobacco use, which, together with the diminishing social acceptance of smoking, have resulted in reduced cigarette industry volume.

Consumer demand has also shifted to e-cigarettes, and this represents another major threat to Altria. Atria's e-cigarette business is conducted through its Nu Mark Division. The company owns both the MarkTen & Green Smoke brands. These brands are tiny, especially when compared to the stake in SABMiller or the dominance of Marlboro in the marketplace.

For context, Altria recently acquired Green Smoke for $110 million this year. The brand achieved $40 million in revenue in 2013.

The above article is an opinion and not investment counsel.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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