Altria Group Inc. (MO, Financial) reported a decline of 3.7% in second-quarter revenues of $4.879 billion as a result of a lower demand for domestic cigarettes and a drop in Marlboro's retail share. The company's adjusted operating company income was $2.594 billion. Compared to the analogous quarter of fiscal 2017, the U.S. tobacco giant reported a 1.8% loss of operating income.
Altria Group shipped about 27.3 billion sticks of cigarettes in the second quarter of 2018 and the retail share of Marlboro, one of the largest selling brands of cigarettes in U.S., went down 0.3% to 43.2%. The company missed consensus on revenues by $140 million.
Despite a 10.8% year-over-year decline in the volume of cigarettes shipped and a lower retail share for Marlboro, Altria Group is still confident in its core tobacco business. The U.S. tobacco giant has increased its average growth rate in adjusted net earnings per diluted share guided for full fiscal 2018 by 50 basis points to 17.5%.
The company now forecasts adjusted earnings to range between $3.94 and $4.03 per diluted share versus an average earnings per share of $4 as per consensus. From the guidance released with the previous quarter’s report, Altria Group has practically increased the lowest limit of the range by 4 cents. The 17.5% hike is a mean of a 16.2% to 18.9% growth range from the adjusted net earnings of $3.39 that Altria Group reported per diluted share for full fiscal 2017.
The shareholders of the company will be remunerated with the distribution of a quarterly cash dividend and with the repurchase by Altria Group of shares.
Altria Group is expected to keep on dispersing free cash flow at a rate of about 80% of adjusted net earnings per diluted share. If the quarterly distribution is held constant, it yields to a forward annual dividend of $2.80 per share, granting 4.83%. The forward dividend yield is compared to a current 1.8% dividend yield of the S&P 500 index and to an industry median of 5%.
The forward dividend yield is computed according to a current share price of $56.10. The stock in Altria Group has fallen 16% for the 52 weeks through July 26 and is now below the 200, 100 and 50-SMA lines and is a 12.5% discount to the midst price of the 52-week range of $53.91 to $74.38 per share.
The market capitalization of the stock in Altria Group is $106.28 billion. The stock is composed by approximately 1.89 billion shares outstanding. This volume will be reduced as the holders of the ordinary stock will also be remunerated through buy-back programs that the company has budgeted for over $1 billion. The repurchase of own shares will be executed by Altria Group no later than the second quarter of fiscal 2019.
The company will do that with liquidity available on hand for $1.43 billion and cash inflow from operations. A sizeable part of resources will be invested in the development of innovative tobacco products. The company has long-term debt of $13 billion. However, the outstanding debt is not a problem because the interest coverage ratio is very high at 13.95. With a debt-to-equity ratio of 90%, the balance sheet of Altria Group is on average more leveraged than the industry.
The U.S. tobacco giant implemented a $487 million buyback program in the first quarter of 2018. The subsequent reduction in securities outstanding together with lower taxes on income supported an 18.8% year-over-year growth in the adjusted net earnings of $1.01 per diluted share in the second quarter of 2018.Â
With an earnings yield of nearly 10%, Altria Group is worth a consideration by the community of income investors. Approximately 86% of total second quarter revenues came in from the sale of tobacco. A portion of 11% from the sale of smokeless products and 3% from the sale of wines.
(Disclosure: I have no positions in any security mentioned in this article.)
