Assessing Altria Group's Results For Q1 2016 (Including Q3 2016 Dividend Projection And Current Price Target)

| About: Altria Group, (MO)

Summary

This article assesses MO’s performance for the first quarter of 2016 and compares year-over-year results via three analyzes.

First, this article analyzes MO’s income statement for the three-months ended 3/31/2016, 3/31/2015, and 3/31/2014.

Second, along with an overview of MO’s main product segments, this article provides a shipment volume performance analysis.

Finally, this article provides a unique analysis of MO’s adjusted diluted EPS, dividend per share rates, and target dividend distributions payout ratio (including 2016 projections).

My summarized thoughts on MO’s performance for the first quarter of 2016, including my current buy, sell, or hold recommendation, are stated in the “Conclusions Drawn” section of the article.

Focus of Article:

The focus of this article is to analyze Altria Group Inc.'s (NYSE:MO) results for the first quarter of 2016 and compare the company's performance to prior periods. First, this article analyzes MO's income statement (technically speaking the company's "consolidated statement of earnings") for the three-months ended 3/31/2016, 3/31/2015, and 3/31/2014. Second, along with an overview of MO's main product segments, this article provides a shipment volume performance analysis for the first quarter of 2016 versus the same timeframe for 2015. Finally, this article provides a unique analysis of MO's historical/projected adjusted diluted "earnings per share" ("EPS"), dividend per share rates, and "target dividend distributions payout ratio" for 2015 and 2016. This assessment article will show past and projected data with supporting documentation within three tables.

I am writing this article due to the continued requests to provide this type of analysis on MO. MO has been the "steady Eddy" stock within my investment portfolio for approximately six years. Due to the notion that some market participants have recently shifted to more "defensive" stocks, I believe MO could be a good investment (at the right price) for readers wanting limited downside risk while obtaining an attractive yield. Understanding certain correlations within a company's business operations can shed some light whether a company is possibly overvalued or undervalued strictly per a "numbers" analysis. This is not the only data that should be examined to initiate a position within a particular stock/company. However, I believe this analysis would be a good "starting-point" to begin a discussion on the topic. My current BUY, SELL, or HOLD recommendation and current price target for MO are stated in the "Conclusions Drawn" section at the end of the article.

1) Assessing MO's Quarterly Consolidated Statement of Earnings:

To begin MO's consolidated statement of earnings analysis for the first quarter of 2016, Table 1 is provided below. Table 1 shows MO's income statement for the three-months ended 3/31/2016, 3/31/2015, and 3/31/2014. Due to the fact MO's performance is higher correlated to seasonal trends, I believe comparing the company's performance on a "year-over-year" basis is the most appropriate type of qualitative analysis. In other words, this type of analysis compares the quarter of one year to the same quarter of a prior year.

Table 1- MO Consolidated Statement of Earnings (3-Months Ended 3/31/2016, 3/31/2015, and 3/31/2014)

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(Source: Table created entirely by myself, partially using MO data obtained from the SEC's EDGAR Database)

Using Table 1 above as a reference, MO reported a "gross profit" (net revenues less cost of sales and excise tax) of $2.3, $2.5, and $2.7 billion for the first quarter of 2014, 2015, and 2016, respectively (see red reference "A"). When calculated, MO increased the company's quarterly gross profit by $0.2 billion in each of the last two years. I believe most readers would agree this has been a consistent, gradual increase in gross profit. The following three main factors, within either most or all of MO's product segments, has helped contribute to this consistent, gradual growth of gross profit: 1) several minor price increases over the past two years; 2) minor shipment volume increases over the past two years (will be analyzed later in the article); and 3) relatively stable market share.

Consistent with MO's gross profit, the company's "operating income" (gross profit less operating general, administrative, and asset impairment/exits costs) slightly increased during the past two years. MO reported operating income of $1.7, $1.9, and $2.0 billion for the first quarter of 2014, 2015, and 2016, respectively (see red reference "B").

Moving down Table 1 above, after accounting for MO's interest expense, net loss on the extinguishment of debt, earnings from its 27% equity ownership stake in SAB Miller (OTCPK:SBMRY), other income, and the provision for income taxes, the company reported net earnings of $1.2, $1.0, and $1.2 billion for the first quarter of 2014, 2015, and 2016, respectively (see red reference "D"). When backing out all non-controlling interests, MO reported earnings of $0.59, $0.52, and $0.62 per share for the first quarter of 2014, 2015, and 2016, respectively (see red reference ("E / F")).

It should be noted during the first quarter of 2015, MO repurchased the company's senior unsecured 9.70% notes due 2018 (the "2018 Notes") and recorded a pre-tax loss of ($228) million on the transaction. At the time, I stated I believed this was a "good move" since the 2018 notes had an interest rate materially above MO's cost of funds rate. The "upfront" loss would eventually be mitigated by lower overall interest expense costs. This was the main reason for 2015's decrease in quarterly EPS.

When assessing MO's results during the first quarter of 2016, I believe the company delivered strong operating performance by continuing to slightly increase its gross profit, operating income, and EPS. When compared to my internal projection (which, at the time, I shared with a handful of interested readers), MO's EPS for the first quarter of 2016 outperformed my expectations by $0.01 per share ($0.62 per share actual versus $0.61 per share projected). Let us move on the next part of this assessment article.

2) Assessing MO's Quarterly Shipment Volume Performance:

Prior to performing MO's quarterly shipment volume analysis, let us first get accustomed to the company's four main product segments. This includes products that are currently "on the shelves" and are generating notable revenue. MO, through the company's subsidiaries and affiliates, manufactures and sells cigarettes, other tobacco related products, and other nicotine-containing products in markets within the United States of America ("USA"). The following are MO's four main product segments: 1) cigarettes (manufactured and sold by Phillip Morris USA Inc.); 2) cigars (manufactured and sold by John Middleton Co.); 3) smokeless tobacco (most manufactured and sold by U.S. Smokeless Tobacco Company LLC); and 4) wine (produced and distributed by Ste. Michelle Wine Estates Ltd.). Let us get briefly describe MO's four main product segments.

Side Note: In addition (as stated earlier), MO currently has a 27% equity ownership stake in SBMRY who is currently in the process of being acquired by Anheuser-Busch Inbev SA/NV (NYSE:BUD).

MO's cigarettes product segment is lead by the iconic brand "Marlboro®"(Marlboro). Simply put, Marlboro accounts for a large proportion of sales/revenue. This includes all products under the Marlboro name (red, gold, black, etc…). MO's cigarettes product segment also includes other premium brands such as "Benson & Hedges®", "Parliament®", and "Virginia Slims®". MO's cigarettes product segment also includes "discount" brands such as "Basic®" and "L&M®".

MO's cigars product segment is lead by the brand "Black & Mild®"(Black & Mild). MO's cigars product segment also includes an "other" sub-classification. However, MO's other cigars product segment accounts for only a fractional share of sales/revenue when compared to Black & Mild.

MO's smokeless tobacco product segment includes brands such as "Copenhagen®"(Copenhagen) and "Skoal®" (Skoal). These two brands account for a majority of sales/revenue within MO's smokeless tobacco product segment. MO's smokeless tobacco product segment also includes an "other" sub-classification.

MO's wine product segment includes brands such as "Chateau Ste. Michelle®," "Columbia Crest®," and "14 Hands®." MO's wine product segment also includes an "other" sub-classification which includes various other brands who individually account for only a fractional share of sales/revenue when compared to the other three brands listed above. Now that we have a better understanding of MO's four main product segments, let us now perform MO's quarterly shipment volume analysis.

Side Note: For interested readers, Phillip Morris International Inc. (NYSE:PM), through the company's subsidiaries and affiliates, manufactures and sells cigarettes, other tobacco-related products, and other nicotine-containing products in markets outside of the USA. In my opinion, PM currently has one main product segment, cigarettes. Similar to MO, PM's cigarettes product segment is lead by the iconic brand Marlboro. Simply put, Marlboro accounts for a large proportion of sales/revenue. This includes all products under the Marlboro name (red, gold, black, etc.). However, when compared to MO, PM's sales/revenue of Marlboro account for a lower percentage of total sales/revenue (proportionately speaking). This is mainly due to the fact PM markets products to the rest of the world and usually keeps specific product names/labels which were previously acquired to maintain brand recognition. PM's cigarettes product segment also includes brands such as L&M, Parliament, "Bond Street®," "Chesterfield®," "Phillip Morris®," and "Lark®." PM's cigarettes product segment also includes an "other" sub-classification. This includes many local/regional cigarette brands located throughout the world.

Table 2 - MO Shipment Volume Performance By Product Segment (Q1 2016 vs. Q1 2015)

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(Source: Table created entirely by myself, partially using MO data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 2 above as a reference, during the first quarter of 2015 MO had a modest decrease in the total shipment volume of the company's cigarettes and cigars product segments while having a minor decrease in its smokeless tobacco segment when compared to the fourth quarter of 2014. Consistent with what occurred during the first quarter of 2013 and 2014, MO had a material decrease in the total shipment volume of the company's wine product segment. Simply put, all four main product segments had a notable decrease in shipment volume during the first quarter of 2015 when compared to the fourth quarter of 2014. As mentioned above, this is mainly due to seasonal trends.

While this same general seasonal trend occurred during the first quarter of 2016 (volume decreases when compared to the fourth quarter of 2015), I believe it is more important to analyze each product segment's total shipment volume on a year-over-year basis. MO reported total shipment volume within the company's cigarettes product segment of 29.2 and 29.5 billion sticks during the first quarter of 2015 and 2016, respectively (see red reference "A"). When calculated, this was a shipment volume increase of 0.3 billion sticks for a year-over-year increase of 1.2%.

Moving down Table 3, MO reported total shipment volume within the company's cigars product segment of 302 and 327 million sticks during the first quarter of 2015 and 2016, respectively (see red reference "B"). When calculated, this was a shipment volume increase of 25 million sticks for a year-over-year increase of 8.3%. Again, this should be seen as a positive trend.

However, to remain "non-bias," management did state when considering all the factors regarding shipment volume within MO's smokeable (cigarettes and cigars) product segment (extra day in 2016, inventory changes, and other miscellaneous factors), there would have been a minor decrease of 0.5% on a year-over-year basis. It should be noted this was in comparison to strong volume performance during the first quarter of 2015. MO's smokeable product segment performance still outperformed the industry average.

Next, MO reported total shipment volume within the company's smokeless tobacco product segment of 191 and 206 million cans/packs during the first quarter of 2015 and 2016, respectively (see red reference "C"). When calculated, this was a shipment volume increase of 15 million can/packs for a year-over-year increase of 7.8%.

Finally, MO reported total shipment volume within the company's wine product segment of 1.7 and 1.9 million cases during the first quarter of 2015 and 2016, respectively (see red reference "D"). When calculated, this was a shipment volume increase of 0.1 million (rounded) cases for a year-over-year increase of 8.1%.

Therefore, it has been determined all four of MO's product segments continued to deliver attractive volumes on a year-over-year basis. This would have been the case even when backing out an additional shipping day due to 2016 being a leap year. In addition, retail market share increased in both the cigarettes and smokeless tobacco product segments offset by a minor decrease in the cigars product segment. As such, I believe MO's price increases, increase in shipment volume, and net retail market share gains across the company's combined product segments should be seen as a positive trend/catalyst. Now let us move on the final part of this assessment article.

3) Assessing MO's Adjusted Diluted EPS, Dividend Per Share Rates, and Target Dividend Distributions Payout Ratio:

MO's executive management team has stated the company's Board of Directors ("BoD") bases its dividend per share rate directly off of adjusted diluted EPS. This figure is slightly different when compared to the EPS figure discussed within the first part of this article. MO's adjusted diluted EPS backs out certain "extraordinary/one-time" items in relation to the company's operations. Such items include (but are not limited to) tobacco/health litigation costs, SBMRY special transactions, and gains (losses) associated with the extinguishment of debt. MO's executive management team has continued to reiterate the BoDs "annual target distribution" is 80% of the company's annual adjusted diluted EPS.

To analyze MO's historical adjusted diluted EPS during 2015 - the first quarter of 2016 (including my projections for the second, third, and fourth quarters of 2016) and dividend per share rates during 2015 - the second quarter of 2016 (including my projections for the third and fourth quarters of 2016), Table 3 is provided below. It should also be noted Table 3 provides MO's actual target dividend distributions payout ratio for 2015 and my projection for 2016. All "pink-shaded" figures within Table 3 below are my personal projections.

Table 3 - MO Adjusted Diluted EPS, Dividend Per Share Rates, and Target Dividend Distributions Payout Ratio (2015-2016)

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(Source: Table created entirely by myself, partially using MO data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 3 above as a reference, MO reported adjusted diluted EPS of $2.80 per share (rounded) for 2015 (see blue reference "A" within the 2015 column; left side). When compared to MO's adjusted diluted EPS of $2.57 per share for 2014, the company increased its annual adjusted diluted EPS by $0.23 per share or 8.75% during 2015. I believe this was an encouraging sign as MO's annual adjusted diluted EPS percentage continued to increase by high-single digits. When broken out, MO reported adjusted diluted EPS of $0.63, $0.74, $0.75, and $0.67 per share for the first, second, third, and fourth quarters of 2015, respectively.

When calculated, MO's target distribution to shareholders for 2015 was $2.24 per share (see blue reference "C" within the 2015 column; left side). This calculates to a quarterly target distribution of $0.559 per share for 2015 (see blue reference "(C/4)" within the 2015 column; left side). In comparison, MO distributed dividends of $0.52, $0.52, $0.565, and $0.565 per share for the first, second, third, and fourth quarters of 2015, respectively. When combined, this was an annual dividend distribution of $2.17 per share. As such, when compared to MO's target distribution of $2.24 per share for 2015, the company had an annual underpayment of $0.07 per share. When compared to a $0.06 per share underpayment for 2013 and 2014, this was a $0.01 per share additional underpayment. When calculated, MO had an annual target dividend distributions payout ratio of 97% which was a minor underpayment. It should be noted this was the same exact payout ratio when compared to 2013 and 2014. This showed consistency which I believe readers should find reassuring. When basing MO's target distribution for 2015 on the new "run-rate" dividend of $0.565 per share which began in the third quarter of 2015, the company theoretically had an annual overpayment of ($0.02) per share. This simply means MO would need to boost the company's 2016 annual diluted EPS by at least $0.02 per share to match the quarterly dividend increase of $0.045 per share which began in the third quarter of 2015. Now let us take a look at MO's reported adjusted diluted EPS for the first quarter of 2016 and my projection for the second, third, and fourth quarters of 2016.

Still using Table 3 above as a reference, MO reported adjusted diluted EPS of $0.72 per share for the first quarter of 2016. When compared to MO's adjusted diluted EPS of $0.63 per share for the first quarter of 2015, the company increased its year-over-year adjusted diluted EPS by $0.09 per share or 14.29%. I believe this was another encouraging sign as MO's year-over-year adjusted diluted EPS percentage increased by double digits.

When MO reported results for the first quarter of 2016, management reiterated annual adjusted diluted EPS of $3.00-$3.05 per share for 2016. Based on management's current guidance, along with other qualitative and quantitative factors, I am projecting MO will reported adjusted diluted EPS of $0.78, $0.80, and $0.75 per share for the second, third, and fourth quarters of 2016, respectively. When combined, this calculates to adjusted diluted EPS of $3.05 per share for 2016 (see blue reference "A" within the 2016 column; right side). If this projection comes to fruition, when compared to MO's adjusted diluted EPS of $2.80 per share for 2015, the company would increase its annual adjusted diluted EPS by $0.26 per share (rounded) or 9.12% during 2016. Once again, I believe this would be an encouraging sign as MO's annual adjusted diluted EPS percentage would increase by high single digits.

When calculated, MO's projected target distribution to shareholders for 2016 would be $2.44 per share (see blue reference "C" within the 2016 column; right side). This calculates to a quarterly target distribution of $0.61 per share for 2016 (see blue reference "(C/4)" within the 2016 column; right side). In comparison, MO distributed/has declared dividends of $0.565 per share for the first and second quarters of 2016. As such, I am projecting MO will declare dividends of $0.61 per share for the third and fourth quarters of 2016. When combined, this would be an annual dividend distribution of $2.35 per share. As such, when compared to MO's projected target distribution of $2.44 per share for 2016, the company would have an annual underpayment of $0.09 per share. When compared to a $0.07 per share underpayment for 2015, this would be a $0.02 per share additional underpayment. When calculated, MO would have an annual target dividend distributions payout ratio of 96% which would continue to be a minor underpayment. I believe this would yet again be another sign of consistency and should be viewed as a positive trend/catalyst.

Side Note: All projected quarterly/annual per share figures with Table 3 exclude any extraordinary/one-time items in relation to SBMRY's pending merger with BUD. For readers unfamiliar with this proposed merger, management expects MO's 27% equity ownership stake in SBMRY will be exchanged for an approximate 10.5% equity ownership stake in BUD. In addition, as part of the proposed acquisition, MO expects to receive approximately $2.5 billion in pre-tax cash. I believe it will be interesting to see what MO does will this cash. For instance, MO could declare a "one-time" special periodic dividend or perhaps repurchase a large amount of outstanding shares of common stock. Simply put, this is still a pending acquisition and management has not specifically commented on what MO will do with its cash proceeds. With that being said, another "hurdle" has recently been overcome this past week when the European Union ("EU") agreed to the SBMRY/BUD merger as long as certain antitrust measures occur (mainly the selling of certain European product lines/assets).

Conclusions Drawn:

This article analyzed MO's results for the first quarter of 2016 and compared the company's performance to prior periods. First, this article analyzed MO's consolidated statement of earnings for the three-months ended 3/31/2016, 3/31/2015, and 3/31/2014. Within this analysis, it was shown the following was MO's EPS for the three-months ended 3/31/2014, 3/31/2015, and 3/31/2016 (year-over-year basis):

MO's EPS for Q1 2014: $0.59 per share

MO's EPS for Q1 2015: $0.52 per share

MO's EPS for Q1 2016: $0.62 per share

Second, along with an overview of MO's main product segments, this article provided a shipment volume performance analysis for the first quarter of 2016 versus the same timeframe for 2015. Through this analysis, it was determined all four of MO's product segments continued to deliver attractive volumes on a year-over-year basis. This would have been the case even when backing out an extra shipping day due to 2016 being a leap year. In addition, retail market share increased in both the cigarettes and smokeless tobacco product lines offset by a minor decrease in the cigars product line. As such, I believe MO's price increases, increase in shipment volume, and net retail market share gains across the company's combined product segments should be seen as a positive trend/catalyst.

Finally, this article provided a unique analysis of MO's historical/projected adjusted diluted EPS, dividend per share rates, and target dividend distributions payout ratio for 2015 and 2016. The following was MO's reported/projected adjusted diluted EPS for the first, second, third, and fourth quarters of 2016:

MO's reported adjusted diluted EPS for Q1 2016: $0.72 per share

MO's projected adjusted diluted EPS for Q2 2016: $0.78 per share

MO's projected adjusted diluted EPS for Q3 2016: $0.80 per share

MO's projected adjusted diluted EPS for Q4 2016: $0.75 per share

The following was MO's distributed/declared/projected dividend per share rate for the first, second, third, and fourth quarters of 2016:

MO's distributed dividend for Q1 2016: $0.565 per share

MO's declared dividend for Q2 2016: $0.565 per share

MO's projected dividend for Q3 2016: $0.61 per share

MO's projected dividend for Q4 2016: $0.61 per share

Based on the historical/projected results from the figures provided above, MO would have an annual target dividend distributions payout ratio of 96% for 2016 which would continue to be a minor annual underpayment. If my projections come to fruition, I believe this would yet again be another sign of consistency and should be viewed as a positive trend/catalyst.

My BUY, SELL, or HOLD Recommendation:

MO, through a continued dominate retail market share in the cigarettes and smokeless tobacco product segments (both continue to have over 50% retail market share), an attractive retail market share of machine-made large cigars (near 30%), and a growing wine product segment, I believe MO will continue to provide attractive quarterly results. As a "bonus" per se in my opinion, MO also currently has a 27% equity ownership stake in SBMRY who is currently in the process of being acquired by BUD. As such, MO's investors have some exposure to the brewing industry which adds even more "insulation" during a "defensive" market.

In addition, there is a high probability MO will continue to repurchase outstanding shares of common stock throughout most (if not all) quarters over the foreseeable future which has cumulative net benefits to shareholders. Furthermore, MO has a much lower impact from the recent negative foreign currency adjustments suffered by most multinational companies due to the recent strengthening of the U.S. Dollar once again. In fact, PM has suspended the company's stock repurchase plan due to the weakening of most global currencies when compared to the U.S. Dollar over the past couple of years. Since MO only has to worry about the strengthening U.S. Dollar in regards to the company's 27% equity ownership stake in SBMRY (likely conversion to BUD shares in the future), negative foreign currency adjustments only have a minor impact on MO's financial statements. I believe MO's low exposure to negative foreign currency adjustments should be seen as positive catalyst for MO.

From the analysis provided above, including additional factors/catalysts not discussed within this particular article, I currently rate MO as a SELL when the company's stock price is trading at or greater than $70.00 per share, a HOLD when trading between $60.01 - $69.99 per share, and a BUY when trading at or less than $60.00 per share.

As such, I currently rate MO as a HOLD since the company's stock price recently closed between a range of $60.01-$69.99 per share. My current price target for MO is $70.00 per share. This is currently the price where my HOLD recommendation would change to a SELL. This price target is a $2.50 per share increase when compared to my last MO article. Between now and my next MO article, I will look to add to my existing position at approximately $60.00 per share.

Final Note: I first initiated a position in MO back in late 2009 and continued to increase my position, at periodic intervals, from 2010 - 2013. Up until MO's dividend for the fourth quarter of 2014, I reinvested all quarterly dividends. Since then, I have elected to receive cash instead of reinvesting my dividends. In the future, I may decide to once again reinvest all dividends received. The weighted average purchase price of my entire MO position is currently $26.115 per share. This weighted average per share price excludes all dividends received/reinvested.

Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader's current investing strategy.

Disclosure: I am/we are long MO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently have no position in BUD, PM, or SBMRY.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.