Altria (MO) followed up decent fourth-quarter earnings (click here), released January 30, with the announcement that it will acquire the e-vapor business of Green Smoke February 3 (click here). Though the move is immaterial to our valuation of the firm at this time, we like that Altria continues to focus on the long-term (the growth of e-cigarettes) as it delivers solid dividend growth to investors. Altria’s fourth-quarter results showed decent 3.6% adjusted earnings expansion, to $0.57 per share, and the company guided 2014 full-year adjusted diluted earnings per share to be in the range of $2.52-$2.59, representing a growth rate of 6%-9% from an adjusted diluted EPS base of $2.38 in 2013.
We think Moody’s updated credit opinion on Altria sums up our position on the firm’s dividend potential quite well, and we reproduce their thoughts below (source):
Altria’s Baa1 long-term and Prime-2 short term ratings reflect the company’s significant scale and the low price elasticity of demand of its principal US cigarette business, the considerable franchise value of its leading premium cigarette, smokeless and other tobacco brands, as well as its strong profitability and stable cash flow characteristics. The company’s significant SABMiller equity stake provides an incremental source of liquidity and earnings diversification. The ratings also reflect the company’s limited geographic diversification with the preponderance of its sales in the U.S., reliance on the secularly declining cigarette segment, as well as ongoing litigation, regulatory and tax risk. Moody’s expects that over time, Altria’s organic growth rate will improve as more of its revenue is generated by its smokeless, cigar, and wine businesses.
Valuentum’s Take
We think Moody’s said it best, noting the firm’s strong profitability and cash-flow characteristics, supplemented by a large equity stake in SABMiller (which can be a source of significant cash, if needed). We fully expect Altria to keep raising its dividend in the years ahead and wouldn’t hesitate to add to the position in the Dividend Growth portfolio on any sustained material weakness.