Will Altria Take to the Bottle to Remain a Must-Have for Retirees?

Includes: BUD, MO, PM, SBMRY
by: Old Trader

There are a handful of long established large firms that may not be glamorous "rock stars", but for decades on end they just continue to crank out outstanding returns for shareholders. Exxon Mobil (NYSE:XOM) would be one such firm, and Altria (NYSE:MO) would be another.

Over the last decade or so, Altria has been trimming itself. Starting with its sale of Miller Brewing in 2002, through its sale of Kraft (KFT) and spinning off its international tobacco holdings as Philip Morris International (NYSE:PM). While every step of the process has generally proved rewarding to its shareholders, I found myself wondering what may lay ahead for Altria.

The firm moved into the smokeless tobacco market with its purchase of UST back at the end of 2008. But I think that the smokeless market will never rival the type of penetration enjoyed by cigarettes, although it almost certainly will continue to grow.

Looking at Altria and its components, aside from its cigarette and smokeless tobacco segments, there are three other components to look at: Wine, cigars, and 'investments'.

When it acquired UST, Altria also got Ste. Michelle Wine Estates, best known as makers of Columbia Crest and Domaine Ste. Michelle wines. Columbia Crest is somewhat of a "mass market" label, but Domaine Ste. Michelle has been moving up-market. It is one of the fastest growing, top ten vintners in the U.S.

John Middleton is a manufacturer of large, machine-made cigars as well as pipe tobacco. Middleton holds the #2 position in its market segment. Just as with the smokeless tobacco segment, there's likely some growth available. But again, not enough to offset declining cigarette sales volume. Naturally, cigar and pipe smoking faces the same type of bans on smoking in public places as do cigarettes.

Which brings me to the last segment: 'Investments'. As a part of its sale of Miller, Altria ended up with a 27.1% stake in SABMIller (OTCPK:SBMRY), the world's second largest brewer behind A-B Inbev (NYSE:BUD). A-B Inbev took over the #1 position from SABMiller when Inbev merged with Anheuser -Busch.

It's certainly worth pondering what Altria may do with this investment going forward. Altria exercises a fair bit of control over SABMiller. Its stake gives it two seats on the board and allows Altria to consolidate a portion of SABMiller's earnings and collect dividends. The cost basis of this position is in the neighborhood of $5B. Based on SABMiller's current market cap of $61.1B, according to Morningstar's figures, the holding has a market value of approx. $16.56 bilion. A sale of the stake would result in a heck of a tax bite, so I'd guess that's an unlikely scenario.

I think it's interesting that there's more than a bit of commonality between the 'sin' industries of alcohol and tobacco. I also wonder if the possibility doesn't exist that Altria would try to lever its expertise in operating in heavily regulated and taxed environments, as well as its position in SABMiller to expand in that direction. Perhaps there's potential benefits to be harvested should Ste. Michelle Estates production be expanded, and distribution be "piggy-backed" onto SABMiller's system. Just because Altria has pulled out of the international tobacco market doesn't mean they may not be interested in moving deeper and more directly into international beer/wine sales.

It appears to me that Altria's holding in SABMiller is the last chance for another big "payday" for investors. Otherwise, while Altria is still almost a "must have" holding for income investors who are close to or already in retirement, the long term trend in growth is down. For those still in the process of building their income portfolios, Philip Morris is the better bet.


Altria Group website


Disclosure: I am long MO.