Earnings Roundup: MO, EPD, SBUX, CLX, HON

By Brian Nelson, CFA

Altria’s (MO) Dividend Growth Outlook Through 2028 Looks Solid

On February 1, Altria Group, which is yielding ~9.5% at the time of this writing, reported mixed fourth-quarter results that showed revenue missing on the top line, but the company’s non-GAAP earnings per share coming in-line with the consensus forecast. For the fourth quarter, net revenue dropped 2.2% as a result of lower sales in its smokeable products portfolio, which was only partially offset by strength in its oral tobacco segment. Adjusted diluted earnings per share was roughly flat thanks in part to both a lower share count and lower tax rate, both of which helped offset modest weakness in its operating companies income (OCI). Altria’s fourth-quarter press release outlined its goals for 2028, which call for a mid-single-digit annual adjusted diluted earnings-per-share compound annual growth rate and a dividend growth goal that targets a similar pace of dividend-per-share expansion. The company plans to maintain a relatively flat debt-to-EBITDA ratio of 2.0x in the coming years (it was 2.2 at the end of 2023), while it plans to keep its total OCI margin at a level of at least 60% in each year through 2028 (it was 60.3% in 2023). Driving this optimistic view is continued strength in the company’s Marlboro, Copenhagen, Black & Mild brands, as well as NJOY, an electric cigarette and vaping products provider, which it acquired in June 2023. Altria retains a large net debt position, but the company remains a strong free cash flow generator, and its sizable stakes in Anheuser-Busch-Inbev (BUD) and Cronos (CRON) offer it considerable financial flexibility. Though the firm won’t be winning any awards from ESG-focused investors, high-yield investors should certainly be taking a close look at the firm. The board recently approved another $1 billion share repurchase program, too.

Enterprise Products Partners (EPD) Looking to Build on Its Newly-Garnered Dividend Aristocrat Status

Midstream pipeline operator Enterprise Products Partners reported excellent fourth-quarter results February 1 that showed a beat on both the top and bottom lines. The company’s diversified, fee-based business handled a record equivalent pipeline volume, marine terminal volume and NGL fractional volume in the quarter, and its resilient gross margin across these business lines and improvement in its propylene and octane enhancement operations helped to offset some pressure on natural gas processing profitability to catapult net income and adjusted EBITDA to record highs. For 2023, distributable cash flow [DCF] covered cash distributions 1.7x, and the firm’s adjusted free cash flow was roughly 94% of distributions. 2023 marked the 25th consecutive year that the firm increased its distribution payout, and the company now yields ~7.7% at the time of this writing. Enterprise Products Partners’ capital expenditures will be elevated in the years ahead, as the firm has $6.8 billion in organic growth projects under construction, including two natural gas processing plants in the Permian basis as well as investments for the Texas Western Products System. The company hauled in ~$7.6 billion in GAAP operating cash flow in 2023, below the ~$8.04 billion levels it recorded in 2022, and management is targeting total capital spending of about ~$4.05 billion at the midpoint, inclusive of both growth and maintenance spending. Enterprise Products Partners likely won’t cover cash distributions with traditional free cash flow in the coming years, given spending on its growth capital projects, but we think it will make it through this period with its distribution not only intact, but with further annual increases, given the strength of the capital markets and generally loose credit conditions for this investment-grade credit. Enterprise Products Partners is yet another quality high yield dividend income idea.

Starbucks (SBUX) Continues to Experience Strong Margin Improvement and Earning Expansion

Image: Starbucks’ international store growth potential remains robust. Image Source: Starbucks

On January 30, Starbucks reported disappointing calendar fourth-quarter results with both sales and non-GAAP earnings per share coming in lower than expectations for the period ended December 31, 2023. Comparable stores sales growth also came in lower than expectations across the board (5% on a global basis versus the 6.4% consensus estimate), with the metric missing the mark by more than a percentage point in North America and more than 4 percentage points in its International division, with slower-than-expected expansion in China. Though key metrics did not live up to the Street’s expectations in the quarter, consolidated net revenue still hit a record high, up 8% on a constant-currency basis, while non-GAAP earnings per share advanced 20%, all the while members to its Starbucks Rewards program continues to expand, up 13% on a year-over-year basis. The highlight in the quarter was the firm’s non-GAAP operating margin, which advanced 130 basis points in the quarter, to 15.8%, as efforts to drive efficiencies and sales leverage helped to offset inflationary pressures in the form of higher wages and general administration costs. For the quarter, Starbucks generated $1.79 billion in free cash flow, significantly higher than the $1.08 billion it recorded in the same period a year ago, and the firm opened 549 net new stores during the quarter (ending the period with 38,587 stores, with 51% company-operated). The big story with Starbucks remains its international store growth potential. At the end of 2023, Starbucks had 20,656 stores in its International segment, with management targeting to expand to 35,000 stores by 2030 (as shown in the image above), offering a long runway of future growth. Shares yield ~2.45% at the time of this writing.

Clorox (CLX) Now Expects Adjusted Earnings Per Share Growth in Fiscal 2024

On February 1, Clorox reported solid calendar fourth-quarter results with revenue and non-GAAP earnings per share beating the consensus estimate in the period. The company recovered nicely from the well-publicized cyberattack in August, with net sales advancing 16% and organic sales up 20%, as it was able to rebuild customer inventories and experienced modest pricing strength in the period. The big story in the quarter, however, was the firm’s gross margin, which expanded 730 basis points from the year-ago quarter, as its efforts with respect to both pricing and cost-savings initiatives are bearing fruit. Likewise, adjusted earnings per share more than doubled in the quarter, to $2.16, as the strong sales increase and gross margin performance more than offset headwinds from foreign exchange and higher overhead and advertising costs. Clorox was a darling stock during 2020 as consumers rushed to buy cleaning products during the COVID-19 pandemic, but its share price has yet to recover, despite the market making new highs. CEO Linda Rendle noted in its latest press release that it “remains a challenging environment to drive top-line growth and rebuild margin,” but the firm’s most recently-reported results show Clorox is making strong progress on this front. Net sales are expected to be down by a low-single-digit percentage in fiscal 2024, but the firm raised its fiscal year adjusted diluted earnings per share guidance to the range $5.30-$5.50, an increase of 4%-8% versus last year’s numbers and up from prior expectations of $4.30-$4.80. Though things are looking much better at Clorox of late, the firm’s year-to-date operating cash flow is down 55% from last year’s levels while it retains a net debt position. Clorox last raised its quarterly dividend to $1.20 per share from $1.18 in July, a modest increase representing its 21st consecutive annual increase. Shares yield ~3.1% at the time of this writing.

Honeywell’s (HON) Free Cash Flow Outlook for 2024 Is Stellar

On February 1, Honeywell reported mixed fourth-quarter results with revenue missing top-line forecasts modestly and non-GAAP earnings per share coming in slightly higher than the consensus estimate. During the fourth quarter, revenue advanced 3% with organic growth of 2% thanks to 15% organic strength in commercial aviation demand, despite industry uncertainty caused by Boeing’s (BA) continued miscues. The company’s ‘Safety and Productivity Solutions’ business experienced considerable weakness in the quarter, declining 24% on an organic basis from last year’s period. Order growth of 30%+ in the division suggests the division is recovering, however. Honeywell’s segment margin expanded 60 basis points, to 23.5%, and adjusted earnings per share advanced 8% on a year-over-year basis, excluding an estimated liability associated with Bendix and a non-cash pension headwind. The company ended the year with backlog 8% higher, at $38.1 billion, reaching a new record. Honeywell continues to be a good steward of capital, too, with the company buying back stock and returning cash to shareholders in the form of dividends, and we’ll be monitoring its integration of its recent $5 billion acquisition of Carrier’s Global Access Solutions business. Looking out to 2024, Honeywell expects organic sales growth in the range of 4%-6%, segment margin expansion of 30-60 basis points, and adjusted earnings per share in the range of $9.80-$10.10, up 7%-10% on a year-over-year basis. Operating cash flow is targeted at $6.7-$7.1 billion on the year, while free cash flow is targeted at $5.6-$6 billion (up from ~$4.3 billion in 2023), both very healthy measures. Cash dividends paid were ~$2.86 billion in 2023, so Honeywell continues to cover its dividend nicely. We’re fans of Honeywell due in part to its lucrative commercial aerospace aftermarket business and strong free cash flow trends, and shares yield ~2.2% at the time of this writing.