We’ve pounded the table time and time again on Altria (MO), even including it in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. The company has been one of our favorite corporate dividend payers, and its large equity stake in SABMiller (SBMRY) offers it financial flexibility like few others. We thought shares have been undervalued for some time, but in the mid-$50s each at present, we’re looking to trim our position. We may use the release of the August edition of the Dividend Growth Newsletter to do so. Altria has a ~4% dividend yield and boasts a 1.2 Dividend Cushion ratio.
Fundamentally speaking, things could not be better for Altria. Second-quarter net revenue advanced nearly 6%, to $6.6 billion, and the company leveraged that expansion into adjusted diluted earnings-per share-growth of ~14%, to $0.74, in the period, a pace slightly better than that in the first quarter. The company upped its guidance for 2015 full-year adjusted diluted earnings per share to the range of $2.76-$2.81, representing growth in the range of 7.5%-9.5% over 2014 levels. We think there’s further upside to come in light of the pace of adjusted diluted earnings-per-share advancement through the first half of the year (13%+), and we would expect Altria’s new $1 billion share-buyback program to help mitigate the impact of difficult year-over-year comparisons, not the least of which stemming from lower gasoline prices. Dividends are targeted at 80% of adjusted diluted earnings per share, suggesting upside to the growth of the payout as well.
Smoking in the US has been on the decline for years, but both pricing and volume increased in Altria’s smokeable segment during the first half of 2015. The company has sold 62.3 billion cigarette sticks year-to-date, up from 60.9 billion in the year-ago period, good enough for a 2.4% increase. Altria’s Marlboro brand is dominating and set record retail market share (now 44%+). Higher promotional investments are bearing fruit across its portfolio, as its total retail cigarette share has jumped 50 basis points through the first half of the year. Even total cigar volumes increased more than 5% through the first half of 2015, despite some share losses at Black & Milds. Adjusted segment margins in Altria’s smokeable segment came in at 47.5% in the quarter, revealing fantastic levels of profitability.
Altria’s smokeless tobacco unit held its ground in the quarter, too, with Copenhagen and Skoal retaining more than half of retail share collectively. Though total smokeless product share has been relatively flat thus far in 2015, cans of Copenhagen and Skoal are flying off the shelves at a ~3.5% pace of advancement. The smokeless segment’s net revenue increased nearly 4% in the quarter, but promotional expenses ate into margins; adjusted segment margins in the smokeless tobacco segment fell 20 basis points in the second period.
Altria continues to work with Philip Morris (PM) in joint research development with respect to the development of e-vapor products, and the company’s Nu Mark MarkTex XL e-vapor products continue to be in high demand. Altria is expanding the reach of its Green Smoke e-vapor products as well, and we expect ongoing traction of Altria’s offerings in the e-vapor market. Perhaps overlooked at times, revenue and adjusted segment income in Altria’s wine segment increased 10% and 25% in the second quarter, respectively, as Ste. Michelle experienced shipment volume expansion, led by Columbia Crest. The wine division has quietly been executing well, and we don’t see any reason why that won’t continue.
Almost everything seems to be going right at Altria, but the firm is no longer the hidden gem it once was. The market is on to its ongoing product pricing strength, and its equity stake in SABMiller has slowly been factored in to shares. We’ll be looking to trim our outperforming position a bit.