Altria Group Inc. (MO, Financial) has applied to the U.S. Food and Drug Administration in order to seek the designation of "modified-risk" for its Copenhagen Snuff Fine Cut.
Copenhagen is one of the four moist smokeless tobacco products in the portfolio of U.S. Smokeless Tobacco Company or USSTC. Altria Group is the parent company of USSTC since 2009.
In 2017, Copenhagen Snuff Fine Cut was the leading smokeless product of USSTC brands with a 33.7% retail share performance. Skoal followed with a 16.7% retail share. Two other products, Read Seal and Husky, made the remainder, covering 3.3% of the U.S. retail market of smokeless tobacco products.
If Copenhagen Snuff Fine Cut is approved for either reduced risk claims or changes in the warning label statements of the product, it will be a meaningful step forward to consolidate Altria Group’s position as a leader in the U.S. market of smokeless tobacco products.
The use of smokeless tobacco products to quit smoking is still challenging. But a U.S. FDA’s approval of Copenhagen Snuff Fine Cut may trigger a growth in the distinct group of adult tobacco consumers.
That application with the U.S. FDA is also a phase of a process in the Altria Group’s diversification portfolio strategy to compensate an eventual cut in the demand of cigarettes and cigars because of mounting campaigns against smoking.
However, the smokable products segment is still the core business of Altria Group. Thanks to a very inelastic demand of tobacco products, Altria Group can still derive about 85 to 87% of its total revenue, operating company income and net profit from the sale of cigarettes. Marlboro is the leader of the segment and the most smoked cigarette brand in U.S.
Also, it is mainly thanks to the high profitability of its core business that Altria Group can guarantee a regular dispersion of part of its free cash flow to its shareholders at a 47% rate of its net income. The company has hiked the quarterly dividend several times since its inception. The company increased the dividend 1.06 times per year over 49 years.
In 2017, the U.S. tobacco giant paid dividends to its shareholders for $4.807 billion and closed the annual income statement with a net profit applicable to common holders of Altria Group of $10.222 billion. That was backed on a revenue of $25.6 billion, which was insignificantly lower compared to 2016.
The most recent 6.1% hike in the quarterly distribution leads to an annualized dividend of $2.80 per ordinary share of Altria Group and to a 69.5% to 71.8% rate of its adjusted net profit per diluted share of the company. The average consensus is for a full fiscal 2018 70.4% pay-out ratio. Altria has a target to return 80% of the adjusted net profit per diluted share of the company. That, which is further proof of the U.S. tobacco giant’s profitability and financial solidity, is the goal of Altria Group.
Altria Group is trading at $61.52 per share. The stock in the U.S. tobacco giant has market capitalization of $116.92 billion, a price-book ratio of 7.61 towards an industry median of 3.78 times. The stock is trading its sales at 6.06 times per share while the industry is at 2.66 times.
The stock has underperformed the S&P 500 index by nearly 13% year-to-date and the current valuation is slightly above the 52-week low of $60.01 per share. The 52-weeks high is $77.79.
According to the chart powered by GuruFocus, the share price of Altria Group is below the Peter Lynch Earnings Line (P/E = 15) and above the Price at Med P/E without NRI (P/E = 3.78):
GuruFocus says that the forward PE ratio is 15.95 times. That, multiplied by a quarterly weighted average EPS of $4.075 for full fiscal 2018 and 2019, leads to a value of $65 per ordinary share.
The dividend yield is 4.28% versus an industry average of 4.55% and towards a 1.8% current dividend yield of the S&P 500.
The forward dividend yield is 4.48%. The industry has a ratio of 5%.
Altria Group has a 1.9 recommendation rating out of a total of 5. As of March 2018, eight analysts out of 14 are for a buying approach while six suggest holding Altria.
The analysts’ average target price is $77.46. That is a mean of 13 estimates ranging from $65 to $85.
(Disclosure: I have no positions in any stock mentioned in this article.)
