Altria: How And When Investors Could Get The Anticipated Special Dividend
Summary
- Altria holds a ~10% stake in Anheuser-Busch InBev which is worth ~$10 billion.
- Shareholders of Altria are income-oriented, and Altria wants to stay in tobacco long-term, so sitting on $10 billion of unrelated paper makes no sense.
- Management knows this, and I think they are keen to sell even with statements that could point to the contrary.
- But when will they sell, and how much will it bring in for investors? Here's my take.
kyoshino/E+ via Getty Images
This is what we know
Altria Group, Inc. (NYSE:MO) owns 185 million restricted shares and 12 million ordinary shares of Anheuser-Busch InBev (NYSE:BUD). The approximate market value of these shares is ~$10 billion.
Most of the ABI asset - as Altria calls it - used to be restricted, meaning Altria could not exit the position in the restriction period. That restriction expired in October 2021 finally allowing Altria to divest the ABI asset. This can be done by converting the restricted shares into ordinary shares at Altria's discretion.
So far, though, Altria has opted not to convert the shares to ordinary shares thereby keeping the ABI asset on the balance sheet.
On 1 February 2023, Altria hosted an earnings call with investors and reiterated the policy not to divest the ABI asset anytime soon:
"I really have nothing to report on the ABI asset. We continue to do the analysis that we do with all capital allocations. And currently, we believe the best thing for the shareholder over the long term is to hold the asset." - Sal Mancuso - CFO
While this may disappoint income-hungry investors, I think it's actually a telling clue: The important part is not so much that management isn't selling ABI right now. The fact is that management already sees holding ABI as a matter of capital allocation. This capital allocation policy includes dividends and buybacks, but apparently also holding ABI until sometime in the future when it makes sense to sell. As a matter of fact, because of Altria's history of buying back its own shares, investors who are indeed long-term in the stock will own a larger and larger residual share of the ABI asset. The per share value of the ABI asset - all else equal - is increasing.
In the beginning of March 2023, Altria exited its disastrous investment in JUUL Labs leaving a combined loss of more than $12 billion in write-offs. This capital loss can only be offset by capital gains. One such source of capital gains could be eventually selling the ABI asset. Analysts have pointed to this event increasing the likelihood that Altria will decide to divest ABI.
From an operational standpoint, selling ABI makes sense. Altria's mantra is "Moving Beyond Smoking", and a flash banner on their corporate website will outline their "new direction" from "tobacco company" to "tobacco harm reduction company". So by moving beyond smoking, Altria doesn't appear to want to deploy its vast cash generation in unrelated businesses. The strategy decided on by management is to stay in tobacco, but doing so by leaving the "burning platform" - no pun intended - of combustible tobacco and transition to alternatives. This is a long process, but one which was recently reiterated with the ongoing takeover of NJOY. On top of this, Altria has a history of selling out unrelated businesses. Examples of this include the 2021 sale of Ste. Michelle Wine Estates and the 2022 wind-down of Philip Morris Capital Corporation.
So why hasn't management sold the ABI asset yet? One explanation could simply be ABI's poor stock performance over the past 5 years (a decline of ~40%) and its poor performance since the termination of the restriction period (almost unchanged):
Seeking Alpha
In 2016, ABI even sat at almost 2.5x the current stock price. Having seen past prices that would value the ABI asset at almost $25 billion (about a third of Altria's market cap!) probably makes it hard to sell at current prices - especially when the matter concerns a company that I would guess almost anyone would expect to still be in existence many years from now. Time could be on Altria's side. My conclusion is simply that management finds the ABI asset to be undervalued by the market temporarily.
This then leaves the question of when it actually would be the right time - and price - to sell out.
What selling Anheuser-Busch InBev could be worth to you if you buy Altria stocks
Let's assume for a moment that the working thesis here is right: Altria eventually sells the ABI asset and the billions come pouring in. Management sticks with their modus of returning cash to shareholders and a special dividend is declared distributing the proceeds. How would the stock price develop after that event? I'm not going to attempt predict price movements, but one question remains open to analysis: To what extent has the market already priced in an expected special dividend from the sale? In other words, if you've already paid for the residual ownership of the ABI asset on Altria's balance sheet, no return is offered even if you are right and hold on to the shares.
My take, however, is that the market has not fully priced in expected proceeds. Let me explain why.
First of all, Altria accounts for the ABI asset under the "Equity Method of Accounting". I will refer you to Note 5 of Altria's 10-K for an elaborate discussion of what exactly this means since all you need to know here is that given this method of accounting, Altria has to record a loss on its consolidated income statement when the fair value of the ABI asset (essentially the market price) declines below its carrying value (essentially Altria's share of ABI's income). This loss - if applicable - is then charged against revenue even if - as is the case here - only a non-cash impairment has been effectuated. In 2021 and 2022 alone, Altria recorded combined pre-tax losses of $8,747 million (almost $9 billion!) because of the equity method of accounting and the required treatment of the asset. This has seriously skewed the impression of Altria's earnings ability and earnings growth:
Altria 2022 10-K, with losses attributable to the equity method of accounting highlighted (includes losses other than ABI-related)
So when the market ascribes a P/E ratio to the stock - based essentially on a consensus interpretation of its growth prospects, assets and general market conditions - this P/E ratio will account for the massive loss attributable to the ABI asset. But if you expect the ABI asset decrease in value to be temporary in nature - like management appears to do since they haven't sold out but believes it's best to stay in for the long-term shareholder - why would you not ascribe a positive effect to the P/E ratio rather than a negative one?
Another reason I don't think the market fully appreciates the value of the ABI asset is one that is more behavioural in nature. Mr. Market doesn't like uncertainty, and there's a lot of uncertainty regarding what exactly is going to come in from the ABI asset and when. In all fairness, it really is hard to value the ABI asset with any kind of accuracy since doing so would require you to know when it's sold and at what price. But then again, the job of an investor is to make one's best assumptions about exactly those two matters. How much will you get paid, and when?
Well, let's see how the numbers could - and I stress could - look. There's a good chance that an investment thesis is not right if it hasn't "proven itself" within 5 years. So to be conservative, I'm assuming that the ABI asset will be sold, but not until 5 years from now. If I'm right in terms of the timeframe, you may ask at what price the ABI asset will be sold. Personally, I doubt that management will want to sell unless the ABI stock price returns to its former levels of around twice its current price. This would put the ABI asset at a roughly ~$20 billion valuation. This equals $11.20 per share currently outstanding. I expect the share count to decrease by an average of 1.5% per year during each of the coming 5 years. With that decrease, the per share value of the ABI asset - with the assumed valuation in 5 years - would be ~$12. This compares to a current stock price of Altria at ~$45 - which of course covers not just the ABI asset but also the actual business of Altria, the tobacco business. Even if you discount the $12 to present-day-value, I believe this illustrates that the ABI asset is very significant in nature (depending on the discount rate of course...) and not very well accounted for in today's stock price of Altria. This is especially true when considering that the actual business of Altria - producing and selling Marlboro cigarettes, John Middleton cigars, and various non-combustible tobacco products etc. generates about $8 billion of free cash flow a year priced at a forward P/E of ~9 by the market.
Conclusion
In my view, Altria is one of those opportunities that Benjamin Graham would have labelled a "special situation". These are opportunities where corporate events that are anticipated or already unfolding will have a very direct and substantial impact on investor value. Among other things this could be a merger arbitrage opportunity or as in the case of Altria owning an asset that might be distributed among owners - atop a business delivering substantial free cash flow.
It is my interpretation that management wants to sell the ABI asset, but the timing is not right at the moment. With the ABI asset valued at ~$10 billion, and management considering it a matter of capital allocation whether to hold the asset.
Like I said, I don't usually like to engage in price predictions, but I think what makes Altria an interesting investment case is that you can buy it simply for the dividend (8%+) and the relatively low market valuation ratios (~9 FWD P/E), but there's another interesting layer to peel off: The true value of Altria as determined if you include the equity holdings of Altria, including the ABI asset. This is hard to do with any level of accuracy, but that's the nature of investing.
I believe the ABI asset could easily be worth ~$12 per share (in absolute numbers, not discounted). I consider this significant because the ABI asset is quite "hidden in the numbers" when you look through Altria's 10-K, and this could lead many investors to only "price in" the value of the tobacco business and forget about the other valuable pieces that make up Altria.
For these reasons, I rate MO stock a Buy.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MO either through stock ownership, options, or other derivatives. 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.
Recommended For You
Comments (191)
TGT -4% too Proves once againGo Woke
Go Broke
I disagree! The homosexual aspect will eventually be accepted, but the transsexual aspect will never be accepted. What parents are finding out is what the LGBT+ community has in store for their children. Disney might recover 10-20% of their losses, Target might do the same, but BUD has to realize there are other beers. Football and baseball are not recovered completely. Bud will have to cut ties completely with Trans-people and go back to patriotic, military, heroic, themes for awhile for their main base beer drinkers to come back. It's difficult for a Marlboro smoker to switch brands but beer drinkers have many alternatives. Target shoppers can go to WalMart for awhile, but will probably come back eventually. Corporations........Shut up about political things!!!! Send Black Rock stooges packing!!!
