(Published Feb. 2 by Bob Ciura)
It was another spectacular year for Altria Group Inc. (MO, Financial) in 2016. The tobacco giant delivered a total shareholder return of 20.5%, marking the fourth consecutive year of total shareholder returns above 20%.
Altria is a dividend growth investor’s dream stock. It is a Dividend Achiever, a group of 272 stocks with 10-plus years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
The company’s dividend history is far more impressive than that however. It has delivered 50 dividend increases in the past 47 years.
Were it not for various spinoffs over the years, which technically reduced Altria’s dividend, it would be a Dividend Aristocrat.
Altria’s amazing share price and dividend returns are fueled by its highly profitable business model, dominant brand positioning and strong free cash flow.
The company released fourth-quarter and full-year 2016 financial results on Feb. 1. We will discuss the results and the company’s future prospects.
Financial overview
Altria is a consumer staples conglomerate. It has various different product lines including cigarettes, cigars, chewing tobacco and wine.
Source: Annual Shareholder Meeting presentation, page 6
Altria generated a massive financial windfall in 2016 when brewing giant Anheuser-Busch InBev (BUD, Financial) merged with SABMiller PLC. Altria held an approximately 26% stake in SABMiller. As a result of the merger, it recorded a $13.9 billion gain for its shares.
Altria now has a 9% stake in the combined company, which should continue to add to earnings going forward.
The transaction skewed Altria’s results. Reported EPS soared 723% to $5.27 in the fourth quarter.
The company’s core operations are performing strongly as well. Earnings per share, as adjusted for one-time items, rose 1.5% to 68 cents.
This beat the average analyst estimate, which called for adjusted EPS of 67 cents.
Full-year adjusted EPS increased 8.2% to $3.03.
In the core smokeable products segment, which constitutes approximately 90% of Altria’s sales and earnings, operating profit rose 5.3% in 2016. This was driven primarily by price increases and, to a lesser extent, cost cuts.
Altria also saw strong results in smokeless products and wine. The company’s smokeless tobacco business is spearheaded by the Copenhagen and Skoal brands.
Copenhagen and Skoal are industry-leading brands. Their collective market share expanded by 400 basis points from 2009 to 2015.
Source: Annual Shareholder Meeting presentation, page 10
The two brands together hold the majority of the smokeless category's market share. Again, this leads to pricing power for Altria.
The smokeless products segment's revenue increased 9.2% in 2016, driven by higher pricing and higher volumes.
Lastly, the wine business includes the Ste. Michelle brand. Altria’s wine business grew revenue by 7.8% in 2016.
Growth prospects
The U.S. tobacco industry is not exactly a growth story, as smoking rates are in decline. In light of this, Altria is investing in new product development.
The most compelling growth catalyst for the company is e-vapor products.
Source: 2016 CAGNY Presentation, page 25
E-vapor is a more than $2.5 billion product category by annual sales, and Altria will surely try for a leadership position.
Within its NuMark subsidiary, Altria expanded its MarkTen e-cigarettes to stores, representing about 55% of the e-vapor retail category.
Altria is also active in heated tobacco. It is developing its iQOS product line in the U.S.
Source: Annual Shareholder Meeting, page 28
Altria intends to submit an application for iQOS approval to the Food & Drug Administration in the first quarter. Assuming the product gets the go-ahead, the next line of iQOS Heatsticks could hit the U.S. market in 2017.
Dividend analysis
One of the best aspects of Altria is its dividend. The company maintains a clear dividend policy, which is to distribute 80% of its annual adjusted EPS through dividends.
Altria’s current annualized dividend payout is $2.44 per share. This equates to a 3.4% dividend yield based on the company’s recent share price.
The S&P 500 Index, on average, has a 2% dividend yield. As a result, Altria is an attractive choice for income investors.
The company typically increases adjusted EPS each year in the high single-digit range, and its dividend growth has averaged around this level as well.
Altria expects adjusted EPS to be in the range of $3.26 to $3.32 in 2017. This would represent 7.5% to 9.5% growth from 2016, and should be enough to raise the dividend by another 8% or so in 2017.
Competitive advantages
One of Altria’s biggest strengths is pricing power. It sells an addictive product and Marlboro commands huge market share in the cigarette industry.
In fact, Marlboro holds a higher market share in the U.S. than the next 10 largest cigarette brands combined.
Source: Annual Shareholder Meeting presentation, page 9
Marlboro clocked in at number 26 in Fortune’s 2016 list of most valuable brands in the world. According to Fortune, the Marlboro brand is worth $21.9 billion.
In addition, since cigarette advertising on television and radio is banned in the U.S.,Ă‚ Altria spends very little on advertising.
The strength of the Marlboro brand is a major competitive advantage because the company can consistently raise prices each year, which is helping Altria offset the decline in smoking rates.
Altria’s steady profits allow the company to return significantly to shareholders. Since the beginning of 2011, the company has returned over $28 billion to shareholders through dividends and share repurchases.
Altria paid $4.5 billion in dividends last year.
In addition, it utilized $1 billion for share repurchases in 2016. It has $1.9 billion left in its current share repurchase program.
Final thoughts
Altria is one of the most highly-regarded dividend growth stocks, and for good reason. The company has raised its dividend consistently for nearly five decades.
The stock also has an attractive dividend yield.
Going forward, Altria faces some significant challenges that it will have to contend with. Falling smoking rates pose a risk, and the company’s earnings growth slowed to 1.5% in the fourth quarter.
Still, Altria should have little trouble generating enough earnings growth to keep raising its dividend. The company has plenty of levers left to pull—including price increases, cost cuts and share repurchases—so that it can continue increasing the dividend.
Disclosure: I am long PM.
Start a free 7-day trial of Premium Membership to GuruFocus.
