Image Source: Melanie Tata
Tobacco giant and simulated Dividend Growth Newsletter portfolio idea Altria pushed its top line slightly higher in the third quarter thanks to ongoing pricing power, and its flagship brand Marlboro continues to dominate in terms of retail share.
By Kris Rosemann
Simulated Dividend Growth Newsletter portfolio idea and tobacco giant Altria (MO) reported third quarter results October 25, revealing slight year-over-year top-line growth of 1.6% as higher pricing offset volume declines in its ‘Smokeable Products’ segment en route to 1% net revenue growth and pricing strength in its ‘Smokeless Products’ segment drove 6.5% net revenue growth. The company’s total cigarettes retail share declined 50 basis points from the third quarter of 2017 to 50.1%, and Marlboro continues to dominate the market at 43.1% retail share, which is roughly consistent with its market share through the first half of 2018 as well as the year-ago period. Adjusted operating companies income (OCI) in its ‘Smokeable Products’ segment was roughly flat from the year-ago period thanks to higher pricing offsetting lower volumes, higher resolution expenses, and higher costs that included strategic initiative investments, but higher pricing in the ‘Smokeless Products’ segment drove reported OCI up 6.3% from the comparable period of 2017.
Altria’s adjusted diluted earnings per share advanced 22.6% on a year-over-year basis to $3.04 thanks to a lower tax bill, higher equity earnings from its stake in AB-InBev (BUD), and higher OCI in the ‘Smokeless Products’ segment, as well as a lower share count, but these factors were partially offset by investments in strategic initiatives and the lower OCI in the ‘Smokeable Products’ segment. Cash flow from operations jumped more than 58% in the first nine months of 2018 on a year-over-year basis, helping drive free cash flow ~61% higher than the comparable period of 2018 to $6.4 billion, which easily covered cash dividends paid of $3.9 billion. The company’s balance sheet remains relatively healthy as it holds $13.9 billion in total debt and $2.4 billion in cash and cash equivalents, which does not consider its ~10% stake in beer giant AB-InBev, and its debt-to-consolidated EBITDA ratio is a reasonable 1.3x as of the end of the third quarter.
Altria’s income generating capacity has been a sight to behold in recent years, and its Dividend Cushion ratio is currently 1.2. Shares are currently trading in the lower half of our fair value range, of which the midpoint is $67, and are yielding ~5.2% as of this writing. We expect to continue highlighting the company as an idea in the simulated Dividend Growth Newsletter portfolio, but we continue to monitor the news stream closely as it relates to potential regulatory changes and other competitive developments across the big tobacco space.
In response to the FDA’s plan to address underage use of e-vapor products, Altria will remove MarkTen Elite and Apex by MarkTen pod based products until the products receive a market order from the FDA or the issue is otherwise addressed. It will also sell only tobacco, methol, and mint varieties of its remaining MarkTen and Green Smoke cig-a-like products in response to the FDA’s flavored e-vapor mandate. Management notes that approximately 80% of Nu Mark’s e-vapor volume as of the third quarter will remain on the market after taking these actions.
Please be sure to read the following news-related pieces regarding FDA actions on the big tobacco space if you haven’t already:
“In the News: Expensive Energy, China’s Trade Surplus and Auto Market, and Big Tobacco Developments” (October 12, 2018)
“In The News: Hurricane Florence, Tariffs and Capital Spending Delays, Kroger and Big Tobacco on the Move” (September 13, 2018)
—–
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.