Tobacco giant Altria (MO) reported second-quarter results Tuesday. The firm is one of the most widely-followed stocks on our website and is included in both the Best Ideas portfolio and Dividend Growth portfolio.
Though Altria’s revenue expanded modestly, net of excise taxes, in the quarter thanks to the firm’s tremendous pricing power, cigarette smoking continues its steady and expected decline in the US. The company’s second-quarter adjusted domestic shipment cigarette volume dropped ~4% in the period, though its core brand Marlboro continues to increase its retail share of the total cigarette category (up 0.3 retail share points in the second quarter).
Altria’s smokeless products segment fared better, growing both the top-line and operating income at a faster clip than the smokeable segment, though this was largely expected. Most anti-tobacco efforts continue to be directed at the smokeable segment, and the smokeless segment is benefiting from growth among younger users. Copenhagen’s and Skoal’s combined volume and retail share expanded during the quarter.
Impressively, ‘OCI’ (operating) margins in Altria’s smokeable and smokeless divisions came in at 44.2% and 66.6% during the second quarter, respectively. These are phenomenal levels of profitability for any type of company, and in this light, it’s easy to understand why Altria is among the most followed stocks on our website. Altria increased its 2014 full-year adjusted diluted EPS guidance from a range of $2.52-$2.59 to a range of $2.54-$2.59, representing a growth rate of 7%-9% from an adjusted diluted EPS base of $2.38 in 2013. The company also announced a new $1 billion share repurchase program to be completed by the end of 2015.
Valuentum’s Take
Altria targets an annual dividend payout of ~80% of adjusted diluted earnings per share, so anytime that its guidance range is increased, dividend growth investors are poised to benefit. The strongest anchor to our thesis on Altria rests in its large stake in SABMiller (see summary information below), which we view as a large source of cash supporting the growth and sustainability of the dividend. We think its ~27% in the fast-growing brewer is not well known within the investment community. Most investors continue to associate Altria primarily with its declining cigarette operations. We don’t expect to make any changes to the firm’s weighting in the portfolios as a result of the quarterly performance.
Image Source: Altria’s 2013 Annual Report