Image Source: Peyri Herrera
Altria continues to successfully battle a challenging demand environment for cigarette volumes across its industry, and the company has once again rolled out expectations for meaningful earnings-per-share growth in 2017. Altria’s stock is among the best performers in history – find out why.
By Kris Rosemann
Some readers may be surprised that (Altria) is a top performer for investors in the face of the onslaught of government restrictions and legal actions that have cost the firm tens of billions of dollars and threaten the cigarette manufacturer with bankruptcy.
But in the capital markets, bad news for the firm often is transformed into good news for investors. Many shun the stock in the company and fear that its legal liability for producing a dangerous product–cigarettes–will eventually crush the firm. This aversion to the firm pushes down the price of (Altria’s) shares and raises the return to investors who stick with the stock.
As long as the firm survives and continues to be very profitable, paying out a good fraction of its earnings in the form of dividends, investors will continue to do extraordinarily well.
— “The Future For Investors,” Jeremy J. Siegel explaining why Altria (MO) “has been the golden company that beat the market by 9 percent per year over the last half century and left every other firm far behind in the race to be number one (through 2003).”
Altria (MO) has been one of the best-performing stocks in history, and we continue to include the company in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. Shares of the tobacco giant yield ~3.4% at current price levels, and we like the resilience of the payout thanks in part to the powerful product pricing dynamics inherent to its business model and the financial flexibility its equity stake in beer giant AB-InBev (BUD) provides. Altria’s policy is to maintain a dividend payout ratio target of roughly 80% of adjusted diluted earnings per share, and it continues to hold its long-term target of average annual adjusted diluted earnings per share growth of 7%-9%, despite a challenging cigarette volume environment. This speaks to how important pricing power is in the tobacco business. The company’s 2017 adjusted earnings per share guidance in the range of $3.26-$3.32 implies a rate of growth above its long-term goals (and that may also mean better-than-expected dividend growth for 2017, too).
That said, Altria’s 2016 fourth quarter report, released February 1, did little to change our opinion of the company’s valuation or dividend strength, the former stretched, in our view. Cigarette volumes remain under pressure (total cigarette unit volume at Altria dropped 4.8% in the quarter, in line with the drop witnessed at brand Marlboro), but pricing gains offset the largely expected declines to a degree. Net revenue fell 1% in the quarter from the year-ago period, but operating companies income (OCI) leapt 4.3% in the quarter as adjusted OCI margins expanded a full 2 percentage points. Adjusted diluted earnings per share advanced 1.5% on a year-over-year basis, helped by stronger pricing, lower benefits costs and lower tobacco and health litigation items in its ‘Smokeable Products’ segment and higher pricing and volume in its ‘Smokeless Products’ segment (along with a slightly lower share count). In light of Altria’s total return to shareholders of 20.5% in 2016 (better than the S&P 500 and the S&P Food, Beverage and Tobacco Index), we think CEO Marty Barrington described the year correctly in the press release: “Altria had another outstanding year.”
Looking ahead to the full-year 2017, Altria expects adjusted diluted earnings per share to grow 7.5%-9.5%, slightly above its long-term goal, to a range of $3.26-$3.32. The company is in the midst of a productivity initiative, announced January 2016, that it expects to deliver $300 million in annualized cost savings by the end of 2017, and it is projecting another $50 million in annualized cost savings by the end of 2018 to come from the facilities consolidation initiative it announced in October 2016. Management continues to do fine job, growing the bottom line, despite industry pressures, and its MarkTen e-vapor product is now available in “stores representing about 55% of the e-vapor category volume in retail channels.”
In 2017, we’re looking for the expectations of high-single digit earnings per share advancement to translate into another solid increase in the quarterly dividend come late August (Altria typically increases its payout each August). Though the company’s net debt position weighs on its Dividend Cushion ratio of 1.1–net debt was ~$9.3 billion at the end of 2016–its 10.2% equity stake in beer giant AB-InBev–estimated at ~$17.6 billion at the end of 2016–gives it considerable financial flexibility and inspires further confidence in the dividend. In the event Altria really wants to ramp up its payout, an opportunistic one-time dividend from the cash proceeds of its AB-Inbev sale would be a significant catalyst for shares.
Though shares of Altria are fully-valued, in our opinion, most of the rest of the broader market is overheated. At the moment, we plan to continue to hold shares of Altria in the newsletter portfolios, as we continue to evaluate the risk/reward profile. Altria was added to both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio below the $30 per-share mark. The company has been one of the best performing stocks since the inception of the portfolios, too. Altria’s weighting in the respective portfolios is 4%-6%.