Altria Group Inc. (MO) reported its second-quarter net income of $ 1.653 billion, or 84 cents per share, on July 27. In the second quarter of 2015, the company reported net income of $1.449 billion, or 74 cents per share. Net earnings attributable to Altria Group increased 14.2% year over year.
Altria's second-quarter adjusted diluted EPS, which excludes the impact of special items, increased to 81 cents with 12.5% from the first quarter and 9.5% from the second quarter and beat analysts' expectations by 1 cent:
Source: Yahoo Finance
Altria’s revenues net of excise taxes were flat at $4.9 billion in the second quarter and increased 2.9% to $9.4 billion for the first half of the year.
Altria’s second-quarter and first-half financial results, which exclude the special items, were primarily driven by higher adjusted operating companies income (OCI) in the smokeable (4.6%-plus in the second quarter and 6.7%-plus in the first half) and smokeless (13.8%-plus in the second quarter and 15.1%-plus in the first half) products segments, higher operating results at Philip Morris Capital Corporation, lower investment spending in innovative tobacco products and lower general corporate expenses.
More than 85% of Altria’s sales and OCI comes from the smokeable products segment – its first-half increase of 0.5% was primarily driven by higher pricing; but in second quarter lower volume and higher promotional investments had such an impact on the segment that sales decreased with 2.4%.
In the picture below you can see the second quarter and first half decrease in the shipment volume of the smokeable products segment. Retail share measures of the segment were flat:
Source: Altria’s second quarter and first half report
Revenues net of excise taxes decreased 1.1% in the second quarter and increased 1.9% for the first half.
The smokeable products segment’s second quarter and first half reported OCI increased 4.6% and 4.3%, primarily driven by higher pricing and lower SG&A costs, partially offset by lower volume and higher resolution expenses.
Source: Altria’s second quarter and first half report
The tobacco giant raised its 2016 full-year adjusted diluted EPS guidance to a range of $3.01 to $3.07 (previously was $3.0 to $3.05), representing a growth rate of 7.5% to 9.5% from an adjusted diluted EPS base of $2.80 in 2015. Of its adjusted diluted EPS Altria expects to continue to return a large amount of cash to shareholders in the form of dividends by maintaining a dividend payout ratio target of approximately 80%.
Altria paid shareholders over $1.1 billion in dividends in the second quarter and $2.2 billion for the first half of the year.
"Altria Group has an outstanding long-term track record of creating value for shareholders" (Altria's website). For example, the company has increased its dividend 49 times in the last 46 years.
The dividend payout of Altria Group from 1994 to July of 2016:
Source: dividend.com
I will estimate a price at which the company can be considered a ''true bargain'' for an investor. A ''true bargain'' is an issue that indicated value that emerges from evaluation (Discounted Dividend model) is at least 50% more than the market price (margin of safety).
How much could Altria Group be worth today?
Altria Group is a large company with a market capitalization value that is more than $129.81 billion as of Aug. 5; from 2011 to 2015 the company produced adjusted diluted earnings per share growth at a compounded annual rate of approximately 8.1% (which has been reaffirmed in its 2016 full-year adjusted diluted EPS guidance), and has consistently grown the dividend. Altria Group outperformed the Standard & Poor's 500 by almost 90% over the last five years.
The company is a faithful issuer of a quarterly dividend and with Marlboro – the best-selling brand of cigarettes in the world – that consistently holds about 38% of the U.S. market.
I would assess AltriaGroup with a dividend discount model and choose the variables as follows:
- The cost of capital of the entire tobacco industry as a discount rate. I would consider a ratio of 11.82% as an average of the entire industry. Data is as of January.
- I would consider the next five years (per annum) of 8.05% as the constant growth rate in perpetuity expected for the dividend, according to the analysts' estimates:
Source: Yahoo Finance
- In line with Altria’s 2016 full-year adjusted diluted EPS guidance I would assume that the annual dividend will increase 7.5% year over year, calculated as an average over the last five years.
You must consider that the 11.82% that I would use as a discount rate is an average of the tobacco industry only; this means that you may want to use a discount rate around 11.5% considering that Altria Group is also engaged in the beverage (alcohol) industry, of which the cost of capital is 7.05% as of January.
Keep in mind that the smaller the difference between the discount rate and growth rate is, the higher the terminal value is. In valuating Altria Group I would also take into account the fact that about 90% of the revenue comes from the smokeable products segment that showed some signs of decline in the terms of shipment volumes during the second quarter and first half.
It must also be noted that during the second quarter, 2,727,443 shares were repurchased at an averare price of $64.07 per share:
As a result of shares repurchased by Altria Group under its share repurchase programs, the dividends paid during the first six months were $2,215 million, an increase of 8.0% from the first half of 2015, reflecting a higher dividend rate, partially offset by fewer shares outstanding.
Disclosure: I have no positions in Altria Group.
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