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Altria: The Debt Burden

Oct. 06, 2019 8:30 PM ETAltria Group, Inc. (MO)120 Comments
Joaquin Grech profile picture
Joaquin Grech


  • Altria Group has increased its debt close to unsustainable levels.
  • Most investors are focusing on Altria’s high dividend yield and great fundamentals without paying attention to debt repayment.
  • In this article, take a look at Altria’s debt, how it can become sustainable and how it could impact negatively its dividend.

Altria Logo


Altria Group (NYSE:MO) has been on the news more than most investors wished for. From the failed merger talks with Philip Morris International (PM) to JUUL Labs' regulatory troubles and change of CEO. Many investors are now looking at Altria’s dividend yield of 8.3% and outstanding past performance and jumping with both feet to purchase shares. This is worrisome to me because I see very few people paying attention to Altria’s amount of debt.

Buy it now, pay comfortably in 30 years

By 2018, it became clear that Juul’s new vaping pods were taking a big chunk of Altria’s cigarette business. Although Altria tried to compete with its own e-cigarettes, Juul had already taken over 50% of the US market with no sign of slowing down. Altria saw its growth prospects evaporate and decided to make two big purchases. It acquired 45% of Cronos Group (CRON) for $1.8 billion, and 35% of JUUL Labs for $12.8 billion. The problem is that since Altria distributes most of its earnings on dividends, it didn’t have enough cash at hand for the purchases. Issuing bonds was inevitable.

Source: Altria’s fixed income information page.

In the previous graphic, you can see how Altria borrowed over $15.8 billion in 2019, adding to a total of $29 billion debt. Its first debt payment of $1 billion is coming up on January 14, 2020, and to the tune of $1 to $2 billion every year after for 30 years. Altria has more than doubled its debt from previous years and increased its debt cost to over 4.1%.

This move did not fare well with the credit rating agencies. Moody’s Investors Service revised the outlook to negative from stable, while S&P Global Ratings downgraded Altria two notches to BBB. Just two notches above junk status.

Can Altria

This article was written by

Joaquin Grech profile picture
Value Investor. I believe there is no distinction between Value and Growth.Investing since 1998, I've lived through three major market crashes. Studied at Columbia and NYU and currently living in Panamá.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (120)

r Negoro profile picture
look if they didnt mess up and bought juul for so high. They wouldnt be this cheap.
@Joaquin Grech great article! question - what if instead of buying stocks, we buy the fixed interest MO corporate bonds that pays 5.8% yearly? do you think MO would be able to pay back to the bond investors? how safe is it? thanks!
It would pay bondholders before shareholders, that is for sure.
Joaquin Grech profile picture
I think both payments are safe as of right now. Bondholders will get paid before anyone else, so it's perfectly fine. I also don't see dividend cuts coming soon. The article points out that in the long term or in case of a crisis, things can get problematic real fast.
11 Oct. 2019
Your analysis' is flawed. Your major assumption in the analysis is so flawed, as if MO managment is unable to allocate capital let alone do some cash and liquidity management.
Why do i even bother writing? ...
Joaquin Grech profile picture
I don’t know. Maybe you wanted a bit of ego boost. It’s healthy. I’ve just done it here 😂
Leftshark profile picture
They own $18-19 billion worth of ABI stock which I believe they can sell in 2021. If you look at the debt ex that, its like 1-2 years of free cash flow. Non issue IMO.
No you just made the author's point. MO doesn't have enough free cash flow to handle unexpected bumps; therefore, it MUST get the cash by:

- selling assets (like what you described)
- issuing more shares
- taking more debt

I am not saying MO is good or bad. I am simply saying the author correctly demonstrated that MO doesn't have much cash for cushioning itself if it ran into a large problem.
Joaquin Grech profile picture
Thanks. Perfectly summarized. And I agree, I'm not saying Altria is a bad investment, I'm just saying you have to be very careful due to the amount of debt. From the other comments I read, maybe I should have made myself clearer.
MO has plenty of free cash flow. The author assumes that MO will repay $6.9 billion of bonds in the next 4 years. Incredibly unrealistic given current interest rates and MO's easy access to the capital markets to refinance.
FDA regulation of JUUL is the best thing that can happen to Altria. Caps future entrants to the market place, reduces competition by cutting out all competitors that don’t/can’t navigate FDA regulatory approval process, ends the “vaping crisis”, and finally drives JUUL to a merger with better terms for MO. Although they could have paid less for JUUL, this crisis is the best thing possible for long term MO holders.
The same with all the states that have put temporary bans on vaping sales. All the smaller entities that can't afford to lose 99% of their sales for three or four months will be gone. You can bet "mom and pop" are cursing the FDA more than the big players are since they probably have little/zero web presence for online sales.
I understand politicians' public need to "do something" but destroying their own locally owned businesses is truly cold blooded.
HensD profile picture
By the time we have more clarity on JUul the stock could be 15 points higher.
There was discussion that PM wanted to buy (merge with) MO but may have called it off because of . . . JUUL.

Really?? We don't suspect there might be MORE to the story? I guess MO wasn't such a good deal to PM after all. Maybe MO isn't such a good deal for us either.
One of the current appealing aspects of MO is the 8% yield.

However MO has a cloud over its head with the investment in JUUL. I suspect there are a huge number of lawsuits filed, or coming, on a local level that are not widely known. For example:


This wasn't in the national news. How many other localized lawsuits are being filed that JUUL will have to deal with? Thousands maybe? Could the legal fees alone sink JUUL?

You can say that MO's liability may be limited since they don't own JUUL, but MO may be guilty-by-association in the public's mind. And as an investor wouldn't you question management's decision to invest so much money in JUUL? Maybe management isn't so good any more? When was the last time you saw anyone on management make an insider buy of stock?

The 8% yield looks fabulous, but you can get more from Imperial Brands (which has its own problems). So maybe a 9% or 10% yield for MO might be on the horizon.

But contrarily, maybe this is the time to back up the truck and buy the stock.
purplemountaingirl profile picture
Doesn't take too much brain power to figure out that Altria will likely buyout the remaining interest in JUUL, regulate it to the hilt and profit from it.

Same for Cronos. That's not doing to well either. Everything is terrible so MO is HOLD.

Teens, Adults like drugs. Nicotine is a drug and if they put less nicotine in e-cigs people will use more product. I don't like vaping or smoking but I can't buy avocado stock, so......
Altria has climbed a wall of worry since the 1970's; there is an end game with tobacco, but its when they can't increase the cost per pack to offset the decline in domestic smoking rates. PM is better overall, but I'll take Altria at 8%+ first.
WelshWB profile picture

I think this is why the government is moving on to e-cigarette hard. This will replace cigarette eventually and it needs to be demonised to the point that the government insists on custom revenue tax for the pleasure of vaping. Therefore it helps get votes and find a substitute product to replace the loss of earnings from tobacco.

Otherwise when cigarettes are gone that lovely fat juicy dividend the government used to get from big tobacco is going to dry up.
WelshWB profile picture
@Joaquin Grech

The concern on JUUL is overblown. The FDA has failed to determine the root cause of the vaping deaths. Anecdotal evidence suggests that the product has been spiked with THC and the culprit are Open vape systems. For your information E-Cigs come in two formats Open and Closed system and closed systems are more difficult to tamper with.

The FDA has already began the journey of curtailing the free for all e-cig market through requirement of comprehensive data to gain license to sell the product. Sadly this means an end of the journey for the mom and pop vape shops and all the small time manufacturers. As they lack the capital to jump through the legal hurdles the government is instigating. This leaves the door open for Altria via JUUL and BAT via VUSE to dominate the E-cigarette market.

Both companies have deep pocket and legal expertise to ensure they can overcome this hurdle in a worse case scenario as they have done with cigarettes. On the other hand if the FDA publicly acknowledge that JUUL and VUSE are safe this will give them the best PR the parent companies can hope for. In one sweep the public will know for E-Cig JUUL and VUSE are the best products.

Being a cynical person I think JUUL and VUSE will face regulatory onslaught but it happens to have ample of resource to weather the storm, which is going to wipeout all the small player. As a long term investor I can't think of a better scenario? The government removing all of my competitors while I just sit and wait out the culling.
Joaquin Grech profile picture
This was playing yesterday all over the news. This can be very hurtful to sales even if not proven: www.thesun.co.uk/...
WelshWB profile picture
@Joaquin Grech

Given the fact that the General Surgeon issued a report back in 1964 linking the deadly effects of cigarettes and nearly 40 million people still smoke in USA I am confident that people will vape regardless of what newspaper claims. That is probable.

On the other hand if you are basing your assertions on "The Sun" it might be worthwhile revising your thesis for two reasons

1. "The Sun" is a tabloid paper and people tend to peruse it for purposes other than reading.

2. In the USA for example people no longer trust the newspaper to the degree they previously used to: www.cjr.org/...

Therefore I don't think it will have a significant impact. If anything it will probably kill the competition who lack the resources to go on public stage and provide scientific data to refute the sensationalist claims made by the papers. However Altria and BAT can.
Joaquin Grech profile picture
It was published on cnn and several other media outlets. I just picked the first link on google. I don’t believe they will ban e-cigarettes, but it can hurt Juul badly if they begin doing negative press
Joaquin Grech profile picture
Thanks to everyone for your comments. Let me try to address most of them:

1) You are absolutely right I didn't write about BUD, IQOS or Juul business expansion. The reason is that when I decided to write, I checked all previous articles and while IQOS and Juul were talked about often, I didn't find anything dealing with Altria's debt. I decided to focus on it and you can refer to the other authors for excellent insight about Altria's business. Definitely, you should not forget about BUD, IQOS, Cronos, Juul and so on.

2) I don't believe Altria will cut its dividends in the short term or that it will repay its debt without refinancing. Neither that Altria will have problems paying its debt at this moment. In fact, I made it clear on the headline "Can Altria pay its debt?" The issue here is that the business dynamics have changed due to the increased debt. Altria has bet the house on Juul's future. There is no way for Altria to reduce its existing debt unless Juul increases considerably in value.

Let's remember, Altria's long-term goal, as stated by its own annual presentation (and management's compensation is attached to it) is to increase EPS by 7%-9% annually. This is literally impossible if they want to reduce their debt. a) if you stop buybacks, you pay the debt but then your EPS doesn't grow as much. b) if you increase dividends, you will need to borrow more c) if you sell assets (like BUD or CRON), you pay debt but you are given up on growth potential.

No matter how you look at it, the only way Altria can begin reducing its debt is by growing net income. And at the current state, that means by growing Juul. And that's the main risk. That's all I'm saying. If Juul works out and keeps growing, it will make up for the loss of revenues from cigarettes, otherwise, Altria will have to take measures to not run out of cash.

In the long run, Altria will need to keep increasing its debt to run its business. And it will hit a point where this is not sustainable. This won't happen in 6 months or 2 years. But it will happen... unless Juul is a success.

3) I see many comments about "Altria is recession proof". Well, that's only partly true. Most people are looking at how it has performed in the last 50 years. But in the past, there was no a new technology like the e-cigarettes. It's like saying: "kodak will be fine, check the last 30 years", before digital came up. Altria made the excellent decision to get into e-cigarettes instead of staying put like Kodak did. But the business dynamics for Altria have now changed. Their future is highly dependant on Juul. I posted a graph titled "U.S. Combustible Cig Growth" in the article. You can clearly see that there is a big reduction during crisis. You can also check MO stock performance during recessions. No, Altria is clearly not recession proof. They fell like a rock although they recovered nicely afterward.

Am I saying Altria will be in guaranteed trouble and cut dividends? NO. I'm saying it could be depending on how the market reacts to these new circumstances. I'm trying to look at the positives and negatives and watch out for developments and I hope I can help someone in the process.

I will write a follow-up article when new financial numbers come out. Thanks again for all the great input and comments. Keep it respectful please ;)
arthur_bishop1972 profile picture
Buying into JUUL was a bet both FOR and AGAINST the future (JUUL). If things go well overall, MO has a chunk of the latest smoking trend. If for some reason JUUL goes up in flames, and some think MO was out to sabotage JUUL, at least until they had a controlling interest, MO will have vanquished the competition and/or bot them out. See how that works??
Is this a serious article? The author thinks MO is going to repay the principal of their bonds at maturity rather than refinance. Really?
MO will refinance if doing so is cheaper than repaying. It is as simple as that. History is full of times where one option was more efficient than the other.
MO can issue a 5 year bond at under 2.5%. Do you really think, as the author thinks, that they will pay off the $1 billion principal of their 2.625% bonds in Jan 2020 rather than refinance?
Patrick Castronovo profile picture
All these Geniuses that say that a dividend cut is necessary... Let me remind you that most investors only buy this stock "MO" because of its dividend! it ain't going to happen...
Bruce Miller profile picture
@Joaquin Grech

For the 4Q ending 2Q19, the CFFO = $6,933 ($MM). Over the same period, the interest expense = $957. This calculates to an interest expense of 12.1% of CFFO + Interest Expense. This is indeed one of the higher of the tobaccos, with PM at 6.1% and UVV at 7.5% (note: VGR is at 53.4%...but that's another story by itself). As large C-Corporations go, this is a bit high. However, this is not new to MO. For the 4Q ending 2Q14 through 4Q17, rolling 4Q interest expense ratios have ranged from a low of 13% up to 15.2%.

You may be right about Juul. I don't know what % of their sales are expected to be coming from that big $12.9B acquisition back in 4Q18. But if states put the Kabosh on vaping sales, this could be a major set back to MO sales and provide a negative NPV on that acquisition. This would not be good.

FWIW, dividends are not paid with earnings....they are paid with net operational cash. For the trailing 4Q, MO paid dividends of $5,831 with a CFFO of $6,933 = 84% payout ratio. This would be an almost guaranteed dividend cut for any other C-Corp, but tobacco stocks typically have much higher payouts due to the highly reliable future cash flows. An extreme example of this is VGR, who has paid out well over 100% of its net operational cash in dividends since I began following it in 2013.

The idea is to raise the price, an additional 4% of the price increase, to cover the new $670 million per year in interest. You can see they've gone up twice in the first half of this year, once in the past.
MO' money!!!
Zain Shamim profile picture
No mention of FCCR (fixed charge coverage ratio) or Debt Leverage? This isn't a credit analysis.
purplemountaingirl profile picture
Thank you for bringing up the debt.

I checked every coupon and while the S&P rating is BBB, and Moody's is A3, all of the debt is trading massively above par with few exceptions. Likewise, it is cheap debt and likely to get even cheaper.

Sell the debt and buy the common shares?
tiagocvidal profile picture
I truly think some of these assumptions don't make any sense and that clouds all subsequent thought
JoeHughes profile picture
I trust $MO management. If they felt it was in the company's best interest to retire debt early rather than investing in share repurchases and other investments, then they would do it.
Thank you Author for raising this question.. As a fairly new investor in MO, I had same concerns and asked a question in one of the other articles. All the responses here are very informative and I am more confident that I didn't make a mistake. I am going to hold on to my shares with a stop loss at $38 (should it ever fall there). Thanks everyone with your responses as they are very informative backed up with Facts.
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