Over the course of the long-term, and the short-term in many cases, investors in Altria Group (NYSE:MO) have been rewarded nicely. While it operates in an industry that is viewed by some as being unappealing to invest in, those willing to invest in a tobacco company have enjoyed some of the top returns that an S&P 500 stock has been able to produce over the course of the long run.
Altria has not only been able to produce solid returns with strength from its core business, but it also has had some spin offs over the last 10-15 years that have paid off well. It spun off Kraft to its shareholders back in 2007, and stands to reward shareholders once again through its growing investment in SABMiller (OTCPK:SBMRY) (OTCPK:SBMRF). SABMiller will be merging with Anheuser-Busch Inbev (NYSE:BUD) soon and as a result, Altria will become a shareholder of Anheuser-Busch.
This article will offer a projection on how much in dividends Altria stands to receive from its investment in Anheuser-Busch going forward, what that means to its own dividend to shareholders for the future, and why Altria remains a good investment to shareholders in 2016 despite the fact that it has risen in value significantly.
Growing Dividend from its Investment in Anheuser-Busch
At the end of May, there was an excellent article posted on Seeking Alpha regarding details of this merger between SABMiller and Anheuser-Busch and on how it affects Altria. One aspect not discussed in that article that I would like to project here is how much higher the dividend will be for Altria.
As mentioned in that article, Altria will be going from a 27% interest in SABMiller to a 10.5% interest in Anheuser-Busch. Anheuser-Busch will have a large market capitalization and this will lead to higher dividends in total from its investment. Per YCharts as of December 31, 2015, there were 1.622 billion shares outstanding of SABMiller and 1.608 billion shares outstanding of Anheuser-Busch. Also per YCharts, SABMiller has a current dividend yield of 1.98%, versus a 3.24% dividend yield for Anheuser-Busch.
A 27% interest in SABMiller means that Altria has roughly 437,940,000 shares in it. Altria also will be included as a shareholder in SABMiller's .9375 per share dividend that will be paid to shareholders on record as of August 3, 2016, and this is expected to be its final dividend before the merger. The dividend per year paid to SABMiller shareholders currently is $1.22 per share, giving Altria approximately $534,286,800 per year in dividends from this investment.
Anheuser-Busch, on the other hand, recently raised its dividend by 20% this year. This dwarfs the approximate 6% dividend increase from SABMiller. This is another reason, going forward, as to why I believe that Altria will make more money from its investment in Anheuser-Busch than it did with SABMiller. This is due to the fact that Altria is effectively a buy and hold investor that only sees cash when it is paid dividends from these investments.
As a result of Altria's upcoming 10.5% ownership stake in Anheuser-Busch, for purposes of this article we will assign a market capitalization (per Yahoo! Finance as of 7/20/16 of $198.92 billion for Anheuser-Busch plus $93.79 billion for SABMiller) of $292.71 billion to Anheuser-Busch. This would work out to a $30.73 billion market value for Altria's stake, in addition to the approximate $2 billion cash payout it will receive for its cash part of the deal. (fluctuation in this occurs due to the daily pounds sterling/dollar exchange ratio). With a 3.24% dividend yield, this would bring Altria $995,652,000 per year in dividends. This large increase compared to what it received from SABMiller is partly due to the fact that its cash and stock proceeds in the deal have sharply risen in value since the merger's announcement. This is the case for Altria's proceeds, where it stands to receive stock.
How This Increased Dividend From Anheuser-Busch Propels Altria
In comparing the $534 million in dividends that Altria receives from SABMiller currently to the projected $995 million it will be receiving from Anheuser-Busch, one can see that this $450+ million increase will help Altria pay its own dividend to shareholders.
As it stands now, Altria has been able to grow its dividend by roughly 8-9% per year over the past few years and has a long history of dividend increases. Per Yahoo! Finance, it grew earnings per share by about the same amount last year and is expected to do the same this year, with earnings growth coming in at around 9%. Because of this earnings growth and its share buyback program, its rise in share price has come with extraordinary dividend growth when compared to other dividend stocks with the same yield. This, in my opinion, is the strongest force that underpins Altria's ability to deliver consistent annual total returns well above those of the S&P 500.
Altria pays out 80% of its adjusted earnings per share as dividends and is very transparent with this policy. Based on its earnings from core operations an its equity investments, 8% or 9% dividend growth is sustainable as a result of its projected growth rate and due to the fact that earnings are consistently meeting expectations. Then, let's factor in an additional $450 million increase from its increased dividends received from Anheuser-Busch. Per Yahoo! Finance, Altria paid out $4.179 billion in dividends in 2015. This makes its increased dividend from Anheuser-Busch roughly 10% of total dividends paid out (after increasing dividends paid to about $4.5 billion in 2016 assuming 8% growth based on actual growth and a reduction for shares bought back). This would support even higher dividend growth going forward and would provide the cash to Altria to pay this out.
To Sum it All Up
Altria is still undervalued in my opinion when considering the most important factor I see - dividend growth. When compared to treasury bonds, Altria's yield is much more compelling since it operates in an industry that is reliable and steady in terms of supply and demand and Altria's leading market share. This is the largest reason, in my opinion, as to why the stock price has gone up as much as it has over the past few years. I feel that we have only scratched the surface of many more capital gains in the years to come.
Altria's dividend yield of 3.27% may look to be just decent, but if you even conservatively (based on my projections of Altria's income here) assume 9% dividend growth for the next five years, you arrive at a 5.03% dividend yield 5 years from now with its share price today. (3.27% growing by 9% per year for 5 years). This, if it comes to fruition, would still prove to be an excellent entry point for new investors in Altria. If the dividend were to grow by 9% for the next 10 years, it would be significantly better than that. Dividend increases by Altria have been announced in August in recent years, so one is likely right around the corner at this point.
Going back to the 1960's, there are few if any other stocks in the S&P 500 that would have provided you with a higher total return than Altria, and in my opinion history is going to repeat itself here. Altria's receipt of Anheuser-Busch shares is yet another exciting development that will reward long-term shareholders of Altria many times over.
Disclosure: I am/we are long MO, BUD, SBMRF.
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.
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