Altria Has Strong Consistent Cash Flow Potential
Summary
- Altria is suffering from inflation, hurting the tobacco business after several years of a decline slowdown.
- The company has seen its earnings and ability to drive shareholder rewards grow consistently.
- Additionally, the company is expanding volumes in non-cigarette tobacco and other sin products.
- We expect this combination will enable Altria to provide increasing and growing shareholder rewards.
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Altria (NYSE:MO) is one of the largest tobacco companies and general "sin" stocks in the world with a market capitalization hovering around $100 billion. The company has an almost 7% dividend yield and remains one of the highest returning stocks in history. As we'll see throughout this portfolio, the company's unique asset portfolio means the potential for continued shareholder returns.
Altria Macroeconomic Weakness
Altria has continued to suffer from macroeconomic weakness in its portfolio.
Altria
Altria Macroeconomic Weakness - Altria Investor Presentation
Customer's wallets are hurting in a high inflationary environment and Altria, by making a higher-end "sin" product, is clearly suffering as a result. Total trips have dropped significantly while the volume per trip has remained roughly constant, resulting in YoY volume (blue line = 2021, red line = 2022) dropping for the company.
Wage growth has been high at the mid-single digits but with short-term inflation even higher, in the short-term at least, customers are struggling. This macroeconomic weakness has resulted in cigarette volumes dropping much more than they have in prior years.
Altria Earnings
Altria has continued to generate strong earnings for investors.
Altria
Altria Earnings - Altria Investor Presentation
Altria managed to increase diluted EPS by 4.7% YoY to annualized earnings of roughly $4.6/share. That gives the company a P/E of ~12 which combined with growing earnings show the company's financial strength. The company maintained its Marlboro retail share QoQ although it declined 0.4% YoY showing the strength of the brand.
The company's minimal costs and financial obligations mean that it can continue to direct the majority of its earnings towards shareholder returns.
Altria Alternative Smoking
The company is continuing to rapidly grow its alternative smoking business as well.
Altria
Altria Alternative Smoking - Altria Investor Presentation
The company has managed to substantially grow its ONP market share. The company increased its market share by 50% to almost 20% of the market. At the same time the company has submitted for FDA regulatory approval of its oral tobacco portfolio, although its waiting for a response. We expect additional government restrictions will both protect consumers and the revenue.
Similarly, the company has increased E-Vapor volume by 10% YoY. The company's growth rate here can help to make up for accelerated tobacco industry declines and protect the company's overall income.
Altria Marijuana and Alcohol
Altria also has, what in our view, are exciting "sin" businesses outside of tobacco.
First, the company still has a 10% stake in Anheuser Busch Inbev SA, valued at roughly $10 billion, and generating roughly $100 million in annual dividends alone. The business earns roughly $600 million in annualized earnings attributable to a company. In a tough spending environment, we expect customers to move to lower-cost brands over fancy new IPAs.
Chart: U.S. Marijuana Market: The Grass Is Getting Greener | Statista
U.S. Marijuana Market - Statista
At the same time, the government is working to legalize marijuana, which makes sense given that marijuana is less dangerous than tobacco or alcohol. Given the regulation around legalization, we expect Altria to be able to take a commanding position in a rapidly growing market. That could provide the company with $10s of billions in revenue.
This represents growth opportunities for Altria's business outside of tobacco, helping to provide the company with additional growth opportunities.
Long-Term Returns
Altria is focused on generating substantial shareholder returns.
Altria
Altria Shareholder Returns - Altria Investor Presentation
Among Altria's largest sources of shareholder returns is the company's dividend yield of almost 6.5%. That costs the company roughly $6.4 billion annualized. The company has also focused on shareholder returns with $2.4 billion in annual share repurchases, pushing the company's total shareholder yield to roughly 9%.
The company has consistently reduced its shares outstanding, and we'd like to see that continue. The company did build up a long-term debt pile of almost $27 billion from a variety of acquisitions, so it now has roughly $1 billion in annual interest obligations; however, we view that build up period as done and expect that too slowly wane down.
Thesis Risk
The largest risk to our thesis is government regulation. Tobacco is a vice, but it has many detrimental health costs and minimum benefits. That also combines with the potential for competition (such as when the company was briefly threatened by the popularity of Juul). That competition and regulation always remains a risk to the company.
Conclusion
Altria has long been punished by the market from its mid-2017 highs. Value stocks have fallen out of favor. However, the company continues to offer investors a dividend yield of roughly 6.5% and it's continuing to opportunistically repurchase shares to the tune of roughly 2.5% annualized. That's a high single digit shareholder yield.
The company is continuing to opportunistically grow earnings and growing market share in alternative products. We see marijuana as a major new growth opportunity for the company as well. This combination of opportunities and the company's assets helps highlight how the company is a valuable investment.
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Mike
