Altria: Inbev Merger Play

| About: Altria Group, (MO)
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Summary

Analyzing the company's recent selloff.

Looking at the real reason Inbev revised the company's bid for SABMiller.

Reviewing Altria's current valuation.

Not all selloffs are created equally. Volatile stocks obviously can move significantly in short periods of time rather frequently, but premium stocks are usually much more stable.

One of the best performing and most consistent stocks in the market for some time has been Altria (NYSE:MO). The U.S.'s largest tobacco company has not just offered consistent growth and dividend for decades, it has seen the company's earnings hold up well even during downturns.

This is why the company's nearly 7% selloff is worth analyzing.

The media recently reported that the reason Inbev (NYSE:BUD) raised the company's bid for SABMiller (OTCPK:SBMRF) was the drop in the pound after England's exit from the EU several weeks ago. Still, this proposed merger is one of the largest deals that has been proposed in the last decade, and I think there is more to the story than a slight and somewhat predictable drop in the pound compared to the dollar.

SABMiller shareholders have long thought that the Inbev proposal undervalues SABMiller's international holdings, and this deal is more important to Inbev for several reasons. Inbev's U.S. market share is strong, but the company's flagship brand Budweiser has not been growing its market share in the company's core market for several years. Inbev also has significantly less exposure than SABMiller to certain key growth markets in Africa and Latin America.

SAB Miller shareholders have been looking for an excuse to force Inbev to raise the company's bid for this fast growing company, and Brexit has given angry shareholders this opportunity. The drop in the pound was an excuse, not the reason for Inbev being forced to raise the company's bid for a merger that still makes sense for both companies. Both companies have already begun selling significant assets to obtain regulatory approval for the deal, and backing out now seems unlikely.

Altria should benefit from the merger for several reasons. In addition to obtaining a large cash payout and gaining access to new and larger markets, Inbev should be able to payout greater dividends than SABMiller because of the company's lower current payout ratio. The deal also offers the more obvious benefits of integrated supply lines and lower costs.

Altria's recent earnings report was strong with the company raising full-year guidance to $3.01-3.08 a share. Tobacco revenues were flat, but the company saw strong market share and revenue growth in the smokeless tobacco segment, and cigarette revenues were flat only because of excise taxes. Altria recently initiated a new cost savings initiative, and the company continues to grow revenues of 8-10% a year, with annual dividend raises of 5-7% a year.

If SABMiller and Inbev complete this unique merger, Altria shareholders should see a number of short-term and long-term benefits. Altria's core business remains strong and the company's premium multiple of 19x forward earnings seem more than justified given the largest U.S. tobacco company's ability to consistently grow earnings and cash flow. Premium comes with a price, but the recent selloff in Altria looks like a buying opportunity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.