Assessing Altria Group's Results For Q4 2018 (Includes Updated 2019 Dividend And Adjusted Diluted EPS Projections)

Summary

• This article assesses MO’s performance for Q4 2018 and compares year-over-year results via three analyzes. First, this article analyzes MO’s quarterly income statement over the prior four years.
• Second, along with an overview of MO’s product segments, this article provides a year-over-year quarterly shipment volume performance analysis.
• This article also provides my thoughts and projected impacts on MO’s financial statements regarding the company’s recently acquired/proposed acquisition of JUUL and CRON.
• Third, this article provides a unique analysis of MO’s adjusted diluted EPS and target dividend distributions payout ratio (includes updated 2019 quarterly dividend and adjusted diluted EPS projections).
• My summarized thoughts on MO’s performance for Q4 2018, current price target, and 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 fourth quarter of 2018 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 12/31/2015, 12/31/2016, 12/31/2017, and 12/31/2018. Second, along with an overview of MO’s product segments, this article provides a quarterly shipment volume performance analysis for 2015-2018 (“year-over-year” comparison). This includes a brief discussion of MO’s recent measures taken regarding the company’s e-vapor/e-cigs products and trade inventory adjustments. In addition, this includes a discussion of MO’s recently acquired and proposed acquisition of Juice USB Lighting (“JUUL”) Labs and Cronos Group Inc. (CRON), respectively. This includes impacts regarding these two events regarding MO’s 2019 financial statements. Third, 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 2018-2019. I will also provide a brief discussion on the recent passage of the Tax Cuts and Jobs Act (“TCJA”) and its impact on MO.

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 after the company reports quarterly earnings. This assessment article alone is not the only data/information that should be examined to initiate a position within MO. However, I believe this analysis would be a good “starting point” to begin a discussion on the topic. My 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 this analysis, Table 1 is provided below. Table 1 shows MO’s consolidated statement of earnings for the three months ended 12/31/2015, 12/31/2016, 12/31/2017, and 12/31/2018. Due to the fact MO’s performance is “skewed” due to seasonal trends, I believe comparing the company’s performance on a year-over-year quarterly basis is the most appropriate type of quantitative analysis for this assessment article. 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 (three months ended 12/31/2015, 12/31/2016, 12/31/2017, and 12/31/2018)

(Source: Table created by me, partially using MO data obtained from the SEC’s EDGAR Database)

Using Table 1 above as a reference, MO reported “gross profit” (net revenues less cost of sales and excise tax) of $2.7, $2.8, $2.9, and $2.9 billion for the fourth quarter of 2015, 2016, 2017, and 2018, respectively (see red reference “A”). When calculated, MO increased the company’s quarterly gross profit by $0.1, less than $0.1 (rounded), and $0.1 billion (rounded) during the fourth quarter of 2016, 2017, and 2018, respectively. I believe readers would agree this has been a fairly consistent, gradual increase in quarterly gross profit. This increase occurred even as various states enacted state excise tax (“SET”) increases and the fairly consistent, gradual net decrease in overall cigarette shipment volumes (discussed in the next section of the article). During 2017, the most notable increase was California’s $2.00 SET increase on a pack of cigarettes (20 sticks) which took effect on 4/1/2017 and on other tobacco-related products on 7/1/2017. The following three main factors, within either most or all of MO’s product segments, helped contribute to this fairly consistent, gradual increase in gross profit: 1) various minor net price increases over the past several years; 2) varying shipment volume fluctuations within all product segments over the past several years (will be analyzed later in the article); and 3) minor fluctuations in overall market share.

Consistent with MO’s gross profit, the company’s “operating income” (gross profit less general operating, administrative, and asset impairment/exits costs) has also gradually net increased during the past several years (when excluding extraordinary, “one-time” items that occurred during 2018). MO reported operating income of $2.0, $2.0, $2.2, and $1.7 billion for the fourth quarter of 2015, 2016, 2017, and 2018, respectively (see red reference “B”). During the fourth quarter of 2018, MO recorded asset impairment and exit costs across several product lines. This includes the following: 1) $209 million asset impairment and exit costs in relation to the discontinuation of production and distribution of all “MarkTen®” (MarkTen) and “Green Smoke®” (Green Smoke) e-vapor products (as a direct result of the new 35% equity stake in JUUL; non-competitive clause); 2) $121 million of pre-tax charges in relation to the recently announced new cost reduction program (a majority of which is related to employee separation costs due to workforce reductions); and 3) $54 million regarding full impairment of “Columbia Crest’s®” (Columbia Crest) trademark due to the accelerated decline in the $7 - $10 premium wine segment and increased competition. When excluding these asset impairment and exit costs, MO would have reported operating income of $2.1 billion. This gradual net increase excludes ALL impacts from recent passage of the TCJA (in case some market participants try to counter this factual assertion by claiming this point).

Moving down Table 1, after accounting for MO’s interest expense, earnings from its former/current 27%/10% equity ownership stake in SAB Miller (OTCPK:SBMRY)/Anheuser-Busch Inbev (BUD), other income (loss) (in relation to the SBMRY/BUD business combination in 2016), and provision for income taxes (here is where the passage of the TCJA positively impacted MO for the fourth quarter of 2017 (notable “true-down” adjustment) and 2018 (lower effective tax rate), the company reported “net earnings” of $1.2, $10.3, $5.0, and $1.3 billion for the fourth quarter of 2015, 2016, 2017, and 2018, respectively (see red reference “D”). If one were to “exclude” the SBMRY/BUD business combination gain in 2016, the notable true-down tax adjustment in 2017 (including adjusting for the then current 2016 and 2017 effective tax rate), and the asset impairment and exit costs in 2018, MO would have reported net earnings of $1.3, $1.4, and $1.5 billion for the fourth quarter of 2016, 2017, and 2018, respectively. Again, I believe readers should see this trend as a gradual increase in net earnings during the past several years. However, I believe readers should be a bit disappointed by the allocated quarterly earnings from BUD during MO’s fourth quarter of 2018 (one-quarter lag). This was mainly the result of increased interest expense due to the elevated amount of debt taken on by BUD to secure the SBMRY acquisition and a relatively flat-minor decrease in overall sales.

When backing out all non-controlling interests, MO reported earnings of $0.637, $5.279, $2.607, and $0.666 per share for the fourth quarter of 2015, 2016, 2017, and 2018, respectively (see red reference (“E / F”)). If one were to exclude all extraordinary events during 2016-2018 (discussed above; including all then current taxation impacts), MO would have reported earnings of approximately $0.67, $0.73, and $0.82 per share for the fourth quarter of 2016, 2017, and 2018, respectively.

When assessing MO’s consolidated statement of earnings for the fourth quarter of 2018, I believe the company delivered a consistent operating performance by continuing to increase its gross profit and EPS (when backing out certain extraordinary items; includes positive impact from the recent passage of the TCJA). Let us move on to the next part of this assessment article.

Overview of MO’s Main Product Segments and Current/Proposed Investments:

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 meaningful 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 (“U.S.”).

The following are MO’s four main product segments: 1) cigarettes (manufactured and sold by Phillip Morris USA Inc. and recently acquired Sherman Group Holdings, LLC and subsidiaries [Nat Sherman]); 2) cigars (manufactured and sold by John Middleton Co. and recently acquired Nat Sherman); 3) smokeless tobacco (most manufactured and sold by U.S. Smokeless Tobacco Company LLC [USSTC]); and 4) wine (produced and/or distributed by Ste. Michelle Wine Estates Ltd.). Let us get briefly get accustomed to MO’s four main product segments.

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

MO’s cigars product segment is led by the brand “Black & Mild®” (Black & Mild). This 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. As stated above, MO also recently acquired Nat Sherman which has allowed the company to expand its “footprint” within this product segment; including the super premium cigarette segment.

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 this product segment. This product segment also includes an “other” sub-classification. USTTC’s modified risk tobacco product application (“MRTPA”) with the U.S. Food and Drug Administration (“FDA”) regarding its Copenhagen Snuff Fine Cut product was submitted in March 2018 and was accepted and filed for substantive scientific review in September 2018. USTTC also recently announced the discontinuation of its “VERVE®” DiscsandChews; mainly due to financial underperformance. USTTC plans to continue to submit applications to the FDA regarding new, innovative products within this segment.

MO’s wine product segment includes brands such as “Chateau Ste. Michelle®”, Columbia Crest, “14 Hands®”, and “Stag’s Leap Wine Cellars™”. This 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 four brands listed above.

In addition, MO recently had/has additional product lines either in the process of being approved by regulators or fully developed that may one day notably contribute to the company’s bottom line. First, in the past this included the e-vapor product MarkTen and MarkTen Elite, a pod-based closed system through Nu Mark LLC (Nu Mark) but due to the recent “cause for concern” regarding the rapid acceleration of teen e-vapor use, last year MO proactively announced Nu Mark removed from shelves/was not going to replenish MarkTen Elite and “Apex®” (Apex) by MarkTen (its entire “pod-based” products) until the company received a market order from the FDA. Since this announcement, MO made the ultimate decision to invest in the future and recently acquired a 35% equity ownership stake in JUUL (discussed earlier). As part of this notable/sizable investment, MO has agreed to a non-competitive clause regarding this specific product segment. As such, along with the anticipated benefits of acquiring a significant minority stake in JUUL, MO announced the discontinuation of all MarkTen and Green Smoke products. To puts things in better perspective, up until its discontinuation, this entire product segment only contributed an extremely minor/very small fractional share to MO’s overall revenues.

Second, MO has a collaboration/partnership with Phillip Morris International Inc. (PM) regarding a heated tobacco reduced-risk product (“RRP”), “IQOS®” (“IQOS”). Recent progress, albeit slow, shows signs of promise as MO/PM await the government’s “official” response to submitted applications (submitted in March 2017 and began to be reviewed in May 2017). In the meantime, MO/PM continues to derive U.S. commercialization plans and believes IQOS will ultimately be approved by the FDA at some point in the near future. I am currently projecting an approval in the summer of 2019. Management reiterates there should be no capacity concerns and minimal delays from FDA approval to widespread distribution.

Third, through the business combination with SBMRY and subsequent purchase of shares in late 2016, MO currently has an approximate 10.1% equity ownership stake in BUD which is the largest beer company in the world. Finally, as mentioned earlier, MO is also currently in the process of finalizing an acquisition of a significant minority stake (which could be converted to a majority controlling stake) in a global cannabinoid company, Cronos Group Inc. (CRON).

2) Assessing MO’s Year-Over-Year Quarterly Shipment Volume Performance:

Now that we have a better understanding of MO’s product segments and current/proposed investments, let us now perform a year-over-year quarterly shipment volume analysis. To start this analysis, Table 2 is provided below.

Table 2 – MO Shipment Volume Performance Analysis (By Product Segment; three months ended 12/31/2015, 12/31/2016, 12/31/2017, and 12/31/2018)

(Source: Table created by me, 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 fourth quarter of 2016, MO had a minor (less than 5%) increase of 2.21% and 4.13% in the total shipment volume of the company’s smokeless tobacco and wine product segments when compared to the fourth quarter of 2015, respectively. MO had a modest (at or greater than 5% but less than 10%) increase of 5.33% in the total shipment volume of the company’s cigar product segment. However, MO had a minor decrease of (4.77%) in the total shipment volume of the company’s cigarettes product segment. This minor net decrease was more consistent with longer-term industry trends within this product segment. In other words, this decrease was more of a reversion to the mean of an annual decline of (3%)-(5%) in cigarette volumes. Simply put, I believe most readers would agree MO’s shipment volume experienced minor-modest growth in three out of the four main product segments during the fourth quarter of 2016 when compared to the fourth quarter of 2015.

During the fourth quarter of 2017, MO had a modest increase of 7.87% in the total shipment volume of the company’s cigars product segment when compared to the fourth quarter of 2016. This was mainly due to MO’s acquisition of Nat Sherman that was finalized near the start of 2017. However, MO had a minor decrease of (0.56%) in the total shipment volume of the company’s smokeless tobacco product segment. In a nutshell, smokeless tobacco had some underperformance when it came to Skoal. In addition, MO had a modest decrease of (8.86%) and (9.68%) in the total shipment volume of the company’s cigarettes and wine product segments, respectively. Wine shipment volumes were negatively impacted by increased competition in the broader sector. The decline in cigarette shipment volumes was more severe versus the longer-term industry trends within this product segment (as outlined above). This was mainly due to the California SET increase of $2 per pack which took effect earlier in the year. Simply put, MO’s premium Marlboro brand experienced a minor retail market share decline as consumers chose cheaper, alternative cigarettes/products.

During the fourth quarter of 2018, MO had a minor increase of 2.86% in the total shipment volume of the company’s cigars product segment when compared to the fourth quarter of 2017. The expansion of Nat Sherman has continued to positively MO’s cigars product segment. However, MO had a minor decrease of (4.44%) and (1.93%) in the total shipment volume of the company’s cigarettes and smokeless tobacco product segments, respectively. Unlike the prior quarter, trade inventory movements and one extra shipping day only caused a (1.1%) adjustment to cigarette shipping volumes for an adjusted decrease of (5.5%). Still, I believe this was a nice “bounce back” from 2017’s performance which was negatively impacted from several state’s SET increases (most notably California; discussed earlier). In addition, MO had a notable (at or greater than 10%) decrease of (15.36%) in the total shipment volume of the company’s wine product segment. Management’s recent comments stated disappointment regarding the broader “less premium” wine segment as a whole (some shift in consumer sentiment/tastes). This was the main reason for the full impairment of Columbia Crest’s trademark during the fourth quarter of 2018 (discussed earlier).

Market participants should understand the adjusted (5.5%) decline as the more accurate cigarettes shipment volume “portrayal” during the quarter. This percentage takes into account certain trade inventory adjustments. Since some market participants continue to be confused by this notion, I will provide further clarity. During any given quarter, there are inventory changes within MO’s product segments that directly impact reported shipment volumes. There is a direct (as opposed to an inverse) relationship between MO’s shipment volume figures and wholesalers’ inventories. For example, if there is a quarterly increase to a wholesalers’ inventories, this typically equates to a quarterly increase in MO’s shipment volume (and vice versa). This type of increase is what occurred during MO’s third quarter of 2018 while the exact opposite occurred during the fourth quarter of 2018. When asked about this slightly more severe shipment volume decline versus industry trends, management stated they believe a combination of excise taxes in Kentucky and Oklahoma (which negatively impacts premium brands such as Marlboro) and recent e-vapor consumer trends contributed to the slightly more severe volume decrease versus recent historical trends.

When taking a step back and looking at the bigger picture, I believe the level of shipment volumes within MO’s cigarettes product segment need to be continually monitored to a heightened degree. The entire cigarette market has continued to experience gradual declines in consumption over a prolonged period of time. I do not believe this trend will change over the foreseeable future. As such, I believe this trend should be viewed as “cautionary”. Even with this more cautionary note, as discussed within the first part of this assessment article, I would point out even with MO’s continued net decrease in shipment volumes within its cigarettes product segment, the company was still able to achieve attractive EPS growth (when backing out certain extraordinary events). Readers should consider this notion as well. Now let us move on the final part of this assessment article.

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

MO’s executive management team has continued to state the company’s Board of Directors (“BoD”) bases its dividend per share rate directly off of adjusted diluted EPS. This figure is different when compared to the EPS figure analyzed 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, the following: 1) tobacco/health litigation costs; 2) SBMRY/BUD special transactions; 3) gains (losses) associated with the extinguishment of debt; 4) gains (losses) associated with derivative instruments; 5) asset impairment and exit costs centered around extraordinary events; and 6) one-time adjustments due to passage of the TCJA (excluding the reduction in effective tax rate).

MO’s executive management team has continued to reiterate the BoD’s “annual target distribution” is 80% of the company’s adjusted diluted EPS for that given year. There were some “bearish” analysts/market participants that recently thought this methodology/ratio might change with the recent and pending acquisition of JUUL and CRON, respectively. As these acquisition announcements were made, I definitively stated I did not believe a change to this methodology/ratio would occur which I believe has proved to be the correct assumption/projection.

In addition, this metric is very important when considering the recent notable reduction of BUD’s dividend. Some market participants were/are worried the recent (50%) reduction in BUD’s dividend per share rate could directly/eventually impact MO’s dividend. However, since MO accounts for the company’s investment through the equity method of accounting, a reduction in BUD’s dividend per share rate has no impact on MO’s income statement. Simply put, since a dividend reduction has no impact on BUD’s income statement (only through the equity section of its balance sheet), there is no impact on MO’s allocated earnings on its own income statement.

The only possible worry would be if MO didn’t have enough “cash flow” per se to pay out its dividend. Simply put, that continues to not be an issue (anyone stating otherwise has been misled/is incorrect). Getting back to BUD’s finances, I would argue with a reduced dividend per share rate, that management team is focusing on “reigning in” their recent notable increase in debt due to their SBMRY acquisition. As such, with a gradual reduction in debt, BUD’s interest expense will likely decrease by some extent in the future. Ultimately, when all other variables are held constant, this would positively impact the proportional share of MO’s earnings from the company’s investment in BUD. I can certainly understand some market participants were not aware of/do not understand this concept. As such, I’m more than happy to point this important notion out. Still, readers should understand this cumulative benefit will not be recognized in just one quarter. This benefit will take multiple quarters (even years) to meaningfully take hold.

To analyze MO’s historical/projected adjusted diluted EPS, dividend per share rates, and target dividend distributions payout ratio, Table 3 is provided below.

Table 3 – MO Adjusted Diluted EPS, Dividend Per Share Rates, and Target Dividend Distributions Payout Ratio (2018-2019)

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

Using Table 3 above as a reference, let us take a look at MO’s reported adjusted diluted EPS and dividend per share rate for the first, second, third, and fourth quarters of 2018 and my projections for 2019. MO reported adjusted diluted EPS of $0.95, $1.01, $1.08, and $0.95 for the first, second, third, and fourth quarters of 2018, respectively. When combined, this calculates to an adjusted diluted EPS of $3.99 for 2018 (see blue reference “A” within the left column). When compared to MO’s adjusted diluted EPS of $3.39 for 2017, the company increased its annual adjusted diluted EPS by $0.60 or 17.70% during 2018. Simply put, this was a notable increase in adjusted diluted EPS on a year-over-year basis.

As a direct result of the passage of the TCJA, MO’s BoD increased the company’s quarterly dividend from $0.70 to $0.80 per share beginning in the third quarter of 2018 (its normal annual increase and a “true-up” adjustment). The reasoning behind this “enhanced” increase was due to the fact MO’s adjusted diluted EPS directly increased, beginning in the fourth quarter of 2017 (due to a “true-down” tax liability/provision adjustment), from passage of the TCJA.

Last quarter, after MO publicly disclosed it acquired a 35% equity ownership stake in JUUL which resulted in obtaining a term loan of $12.8 billion, I projected MO would report the following adjusted diluted EPS range for the fourth quarter of 2018:

Previously projected adjusted diluted earnings for Q4 2018: $0.94-$0.98 per share

Actual adjusted diluted earnings for Q4 2018: $0.95 per share

As such, MO’s adjusted diluted EPS came in ($0.01) per share below the mean of my projected range. Moving to 2019, I am currently projecting MO will report adjusted diluted EPS of $0.97, $1.06, $1.14, and $1.01 for the first, second, third, and fourth quarters of 2019, respectively. When combined, this calculates to a projected adjusted diluted EPS of $4.18 for 2019 (see blue reference “A” within the middle column). If this projection comes to fruition, when compared to MO’s adjusted diluted EPS of $3.99 for 2018, the company would increase its annual adjusted diluted EPS by $0.19 or 5.35% during 2019. Simply put, this would be a modest increase in adjusted diluted EPS on a year-over-year basis.

Still using Table 3 above as a reference, my current projection regarding MO’s target distribution to shareholders for 2019 is calculated to be $3.34 per share (see blue reference “C” within the middle column). This calculates to a quarterly target distribution of $0.836 per share for 2019 (see blue reference “(C / 4)” within the middle column). Based on the data above, this would calculate to MO declaring a dividend of $0.80, $0.80, $0.84, and $0.84 per share for the first, second, third, and fourth quarters of 2019, respectively. When calculated, this would be an annual dividend distribution of $3.28 per share. As such, when compared to MO’s projected target distribution of $3.34 per share for 2019, the company would have an annual underpayment of $0.06 per share. When based on the projected 2019 new “run rate” dividend of $0.84 per share (beginning in the third quarter of 2019), this calculates to an overpayment of ($0.02) per share or a 101% payout of the 80% adjusted diluted EPS payout ratio; consistent with 2018. I currently believe providing a narrow adjusted diluted EPS and dividend per share rate “range” for 2019 is appropriate. These ranges will be summarized below.

Conclusions Drawn:

First, when assessing MO’s consolidated statement of earnings for the fourth quarter of 2018, I believe the company delivered a consistent operating performance by continuing to increase its gross profit and EPS on a year-over-year quarterly basis (when backing out certain extraordinary items).

Second, along with an overview of MO’s main product segments, this article provided a shipment volume performance analysis for 2015-2018 (year-over-year quarterly comparison). Through this analysis, I believe MO’s shipment volume performance for the fourth quarter of 2018 was positive in regards to the cigars product segment and neutral-slightly cautious in regards to the smokeless tobacco and cigarettes product segments. However, the wine product segment was a modest (some could argue notable) underperformance which was a disappointment. I believe MO’s cigarettes and wine product segment’s performance needs to be continually monitored in future quarters.

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 2018 and 2019. The following was MO’s reported adjusted diluted EPS for the first, second, third, and fourth quarters of 2018, respectively:

MO’s reported adjusted diluted earnings for Q1-Q4 2018: $0.95, $1.01, $1.08, and $0.95 per share

The following is my projected MO adjusted diluted EPS for 2019:

Projected adjusted diluted earnings for 2019: $4.18 per share (range $4.15-$4.21 per share)

The following is my projected MO dividend per share rate for the first-fourth quarters of 2019 (per GAAP):

MO’s projected dividend for Q1-Q2 2019: $0.80 per share

MO’s projected dividend for Q3-Q4 2019: $0.84 per share (range $0.84-$0.86 per share)

When calculated, I am currently projecting MO will increase the company’s quarterly dividend by $0.04-$0.06 per share beginning in the third quarter of 2019 (per the accrual method of accounting; GAAP). This is a projected lower per share increase, when compared to 2018, due to the fact MO’s 2018 adjusted diluted EPS was “enhanced” as a direct result of passage of the TCJA. This was a one-time/extraordinary event. I believe MO’s dividend per share rate increase for 2019 will be more towards recent historical trends, hence excluding 2018.

My BUY, SELL, or HOLD Recommendation:

I believe MO, through a continued dominant retail market share in the cigarettes and smokeless tobacco product segments (both continue to near or over 50.0%), will continue to provide attractive quarterly/annual results. MO also currently has an approximate 10.1% equity ownership stake in BUD, the largest brewer in the world. Even with the recently announced (50%) dividend cut, I still believe BUD is an attractive investment for MO. As such, MO’s investors have some exposure to the brewing industry which adds even more “insulation” during a defensive market.

As mentioned earlier, MO also recently acquired a 35% equity ownership stake in JUUL for $12.8 billion. Many market participants believed the price MO paid for this percentage stake in JUUL was excessive. While I agree the price paid for JUUL was a bit “steep”, I also understand MO’s line of reasoning for why management wanted to acquire this investment. Simply put, it secures MO’s future for years (possibly decades) to come. MO is also currently in the process of finalizing an acquisition of a significant minority stake (which could be converted to a majority controlling stake down-the-road) in CRON. Similar to the JUUL investment, I believe management is opportunistically looking towards the future regarding expanding the company’s investing base in cannabis and cannabis-related products. Similar to MO’s JUUL investment, there is the potential for tremendous global growth and opportunity in this field. Furthermore, this proposed acquisition will be mutually beneficial for both MO and CRON for years to come. However, to remain non-bias, it should be noted both these investments will take multiple years before having a notable impact on MO earnings (still in infancy–early growth stages which need modest-notable capital for continued expansion).

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 (as exhibited over multiple years). To remain non-bias, I do project the amount of MO share buybacks, from a monetary perspective, will decrease versus the past several years. This is mainly the result of the accrued interest expense on MO’s large new term loan which was created to fund JUUL’s acquisition and CRON’s potential acquisition. However, MO’s recent cost reduction program should partially offset this factor to some extent.

Furthermore, recent shipment volume declines and relatively flat retail market share within MO’s cigarettes product segment need to be monitored in future periods. In addition, future developments regarding IQOS, e-vapor/RRPs (such as British American Tobacco p.l.c.’s (BTI) recent Glo™ and Eclipse™ devices), and the FDA (for instance MO’s recent acknowledgment the company will support increasing the minimum age to purchase any tobacco product from 18 to 21) need to be carefully monitored (which I intend to do).

MO recently closed at $49.04 per share as of 2/5/2019. From the analysis provided above, including additional factors/catalysts not “fully” discussed within this particular article (for instance all the possible outcomes from recent/potential FDA announcements), 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. These ranges are a ($5.00) per share decrease when compared to my last MO article (approximately three months ago). This decrease is the result of lower projected adjusted diluted EPS over the next several years which is directly in relation to the increase in accrued interest expense from MO’s recently created $12.8 billion term loan for the 35% equity ownership stake in JUUL (which would slightly expand if/when the CRON acquisition is approved/finalized). This decrease also considers the assumed partial reduction in share buybacks over the foreseeable future.

Still, I believe the recent notable sell-off in MO has been unwarranted/overdone. Therefore, I currently rate MO as a STRONG BUY. As such, I currently believe MO is notably undervalued. My current price target for MO is $70.00 per share which calculates to current price appreciation of 42%.

Final Note: 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. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions.

MO Stock Disclosures:

I first initiated a position in MO back in late 2009 and continued to increase my position, at periodic intervals, from 2010-2013. On 10/4/2016, for the first time in several years, I “directly” increased my position in MO at a weighted average purchase price of $61.85 per share. On 3/1/2017, I sold approximately 33% of my entire MO position at a weighted average price of $75.605 per share as my price target, at the time, of $75.00 per share was met. On 3/2/2017, I sold another approximate 33% of my existing MO position at a weighted average price of $75.85 per share. On 3/8/2017, I sold my remaining position in MO at a weighted average price of $76.025 per share. The weighted average purchase price of my entire MO position was $29.78 per share. This weighted average per share price excluded all dividends received/reinvested. The total return of my MO investment, excluding all dividends received/capital gains on reinvested dividends, was 234.3%.

On 8/21/2017, I once again initiated a position in MO at a weighted average purchase price of $63.465 per share. On 3/1/2018, 4/19/2018, 4/27/2018, 7/19/2018, 11/26/2018, and 1/25/2019, I increased my position in MO at a weighted average purchase price of $62.407, $56.78, $54.82, $55.81, $53.06, and $43.81 per share, respectively. When combined, my MO position has a weighted average purchase price of $50.598 per share. This weighted average per share price excludes all dividends received/reinvested. Each MO trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

All trades/investments I have performed over the past few years have been disclosed to readers in real time (that day at the latest) via the StockTalks feature of Seeking Alpha (which cannot be changed/altered). Through this resource, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered). Through StockTalk disclosures, at the end of January 2019 I had an unrealized/realized gain “success rate” of 87.2% and a total return (includes dividends received) success rate of 100% out of 39 total positions (updated monthly; multiple purchases/sales in one stock count as one overall position until fully closed out [no realized total losses]). The modest increase in both percentages, when compared to December 2018, was due to the fact my position in several stocks once again turned modestly-notably positive (mainly due to the recent market rally). I encourage other Seeking Alpha contributors to provide real time buy and sell updates for their readers which would ultimately lead to greater transparency/credibility.

Analyst’s Disclosure: I am/we are long MO, CRON. 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.

I currently have no position in BTI, BUD, or PM.