Altria Group (MO) is engaged in the manufacture and sale of cigarettes and certain smokeless products in the U.S. With 50% market share in the U.S. tobacco industry, the company dominates the market. Altria owns UST, the world's largest moist smokeless tobacco manufacturer by sales. UST provides Altria with the leading smokeless tobacco brands, Skoal and Copenhagen. The company's diversification into smokeless tobacco is crucial to promoting its growth due to the declining market for smokers in the U.S.
Altria, whose brands include top-selling Marlboro cigarettes, Skoal smokeless tobacco and Black & Mild cigars, also reaffirmed its 2013 full-year adjusted earnings forecast of between $2.35 and $2.41 per share. The company also owns a wine business, holds a voting stake in brewer SABMiller, and has a financial services division.
Philip Morris USA (PM USA) is Altria's domestic cigarette manufacturing company. Philip Morris remains the largest tobacco company in the U.S. by both revenue and volume.
Altria has been a huge winner over the past half-century, having survived countless regulatory threats, lawsuits, and public campaigns to reduce tobacco use and cut into its core business. Even though cigarette smoking has become less popular over that span, Altria and its peers have managed to keep profiting from the industry.
Altria’s Q1 profit margins rose despite of declining cigarette volume. It generates more than $4 billion in annual free cash flow and the stock yields 4.5%. Net margins are above 20%. Altria has been relying on price increases to drive revenue growth as sales volume for conventional cigarettes declines. The company has been taking steps to mitigate the impact of dropping sales volume by strengthening its smokeless products portfolio and increasing its promotional spending.
Altria is continuously making efforts to diversify into smokeless and alternate tobacco products. With these initiatives the company seems to make progress. The performance of the company's smokeless segment remained solid. The Copenhagen brand was a driving factor which was slightly offset by a weakness in Skoal. The volume of Copenhagen brand was up 11%. There was a 0.6% drop in the volume of Skoal.
Interest in SABMiller
Altria holds a stake in SABMiller, the world's second-largest beer brewer. It holds a stake of 26.8%. Altria carries the stake at $6.7 billion on its balance sheet, which is about 15 times the $439 million in dividends Altria collected from the position in 2013. Altria's holding in SAB is actually one of the fastest growing parts of the group. Specifically, since 2008 Altria's annual income from its share of SAB has jumped from $467 million to $991 million as reported during 2013; a compounded annual growth rate of 16.2%.
If Altria's income from SAB continues to expand a 16.2% per year, income from the holding will begin to rival cigarettes as Altria's main income source with a decade. What's more, considering the fact that Altria's initial investment in SAB was $6.5 billion, an income of $991 million for fiscal 2013 indicates an annualized return on investment of 15.2% -- not bad.
Acquisition of Green Smoke
During the first quarter of this year, Altria completed the acquisition of Green Smoke Inc.’s e-cigarettes business for $110 million. Founded in 2008, Green Smoke sells e-cigarettes in the U.S. and Israel. In 2013, the company’s total e-cigarette sales stood at ~$40 million, which implies a market share of over 2.5%. Green Smoke, being one of the premium e-cigarette brands in the U.S., fits well with Altria’s overall marketing strategy focused on premium brands. The tobacco giant’s portfolio includes brands such as Marlboro and Copenhagen that hold leading positions in their respective categories. The strategy is one of the key factors behind Altria’s strong financial performance over the past several years. This is because tobacco companies rely primarily on pricing for their growth, which is easier to implement with premium brands.
What to Expect
The company is heavily spending on promotions and is working heavily for image buiding. These efforts are surely going to take the company forward and the smokeless segment will improve. The potential of electronic cigarettes is the new, hot story in the tobacco industry. Sales are growing, and big tobacco companies such as Altria is busy building out its presence in the industry.
Over the long term, Altria expects to deliver 7% to 9% earnings per share growth on the strength of its diverse business model and solid performance by its core tobacco business. Altria plans to maintain a dividend payout ratio of approximately 80% of earnings.
Altria might have taken longer than its peers to make a first move in the burgeoning e-cigarettes market, but it has moved quickly since then to gain a strong momentum in the category. With the national rollout of its MarkTen product on the way and Green Smoke acquisition complete, the company is set to pose a stiff challenge to the existing e-cigarette leaders in the U.S.
The tobacco industry has long been a great place for high dividend yields. Presenting findings from a study of almost 6,000 smokers over five years, the researchers said the results suggest e-cigarettes could play an important role in reducing smoking rates and hence cutting tobacco-related deaths and illnesses......."E-cigarettes could substantially improve public health because of their widespread appeal and the huge health gains associated with stopping smoking," said Robert West of University College London's epidemiology and public health department, who led the study.
Altria has a reputation as an income investor's staple. It has been inculcating in shareholder-friendly policies and is expected to provide value for investors. It has a record of healthy operating cash flows. The venture of the company into e-cigarettes will support growth in the near future.
Altria continues to show great potential and still has several relative advantages over its competitors, including its dominance in cigarette market share, high dividend yield and diversification with other assets.
Altria’s tobacco companies are well-positioned in the U.S. tobacco space. They have the leading positions in the largest and most profitable tobacco product categories. And in each of these categories, Altria competes with premium brands that enjoy strong equity and higher margins than most of their competitors. For decades, the company has pumped out steady profit growth and returned a great deal to shareholders.