Altria: A company with a large competitive advantage and a high dividend yield.
Opdateret: 7. aug.
Altria is a company that has a significant competitive advantage and offers a generous dividend payout. However, it is also a company that is facing some risks that it will need to overcome. The question is whether the risk/reward is worth it, and it is time to add Altria to your portfolio. In this analysis, I will share my thoughts on Altria.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that I have previously owned shares in Altria but decided to sell them. If you would like to view or copy my copytrading portfolio, you can find instructions on how to do so here. As I have no personal stake in Altria, it should be easy to maintain an unbiased analysis. If you want to purchase shares or fractional shares of Altria, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.
Altria is primarily recognized as the parent company of Philip Morris USA, responsible for distributing all Philip Morris products in the United States. One of their most well-known products is Marlboro. It also means that Altria only hasexposure to the U.S. market. Besides selling various tobacco products such as cigarettes, cigars, and oral tobacco products, they also have around 10% of the shares in Anheuser Busch (beer) and 41% of the shares in Cronos (cannabis).Altria previously owned 35% of Juul, a company that manufactures electronic cigarettes. However, in March 2023, Altria exchanged its minority ownership in Juul for property rights related to heated tobacco. Altria has two easily identifiable moats. First, they have a brand moat when it comes to their products, as consumers trust well-established brands such asMarlboro. The other moat is a toll moat. It is forbidden to advertise tobacco products in the United States. Therefore, it is highly unlikely that we will see new competitors entering the market.
Their CEO is Billy Gifford. He has been with Altria for over 25 years, serving in various roles including Vice Chairmanand CFO, before assuming the position of CEO in 2020. As he is relatively new to the job, it is difficult to determine whether he is a good CEO. However, I appreciate his extensive knowledge of the entire company, gained through hisleadership roles in various departments including strategy and business development, finance, marketing, and consumer research. Personally, I also like that he has sold Ste. Michelle Wine Estates business for $1,2B, meaning that Altria no longer has exposure to the wine business. After the sale, he stated, "We believe the transaction is an important step in Altria's value creation for shareholders and allows our management team to focus more on the responsible transition of adult smokers to a non-combustible future." There are several things I like about that statement. I appreciate the emphasison creating value for shareholders, and I am also impressed by the vision of transitioning from cigarettes to non-combustible alternatives. It is still too early to say if we can trust the new management, but I believe we are off to a good start.
I believe that Altria has a brand moat and a toll moat. While it is too early to say if management is good, I believe we are off to a good start. Now, let us investigate the numbers to determine if Altria meets our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all years. Historically, Altria has delivered some great numbers well above the required 10%. However, since 2017, the numbers have been significantly lower than what we have been accustomed to. 2019 was a bad year, but Altria has delivered above or close to the 10% that is required in all years since.Altria managed to regain their impressive ROIC in 2022. The question now is whether they will be able to sustain this level of ROIC in the future.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. It is not exactly the kind of development you would like to see. Ever since 2018, the book value + dividend has decreased significantly. One reason for the decrease is that Altria has reported a reduction in the carrying value of Juul, Cronos, and Anheuser-Busch. The decrease in 2022 is mainly because Altria sold the Ste. Michelle wine business in late 2021. Altria will not continue to reduce the carrying value of these investments,and hopefully, this means that the book value + dividend will increase moving forward. Nevertheless, these numbers are not encouraging.
Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. These numbers are much more encouraging. Altria has generated a significant amount of cash and achieved its highest revenue in the past 10 years in 2021. And while it decreased slightly in 2022, Altria still delivered a high levered free cash flow margin. Free cash flow yield is high, which suggests that the share is trading at a good value. However, we will discuss this further later.
Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by current earnings. Doing the calculation for Altria, I can see that Altria has 4,37 years of earnings in debt, which is higher thanwhat I feel comfortable with. However, Altria has managed to pay down its debt from where it has been in the last two years, which is a positive development. Nonetheless, I believe that debt needs to be monitored.
Like with all other investments, there are some risks associated with investing in Altria. One of the largest risks is that the tobacco industry is highly regulated. Right now. Altria faces several new regulations. The Biden administration, forexample, aims to ban menthol cigarettes. It is difficult to predict how a ban on menthol cigarettes will affect Altria, but management has mentioned that their share of menthol is 9,4 %. EU and UK previously banned menthol cigarettes, causing most menthol smokers to switch to non-menthol cigarettes. However, this does not necessarily mean that the same outcome will occur in the United States. The Biden administration is also considering reducing nicotine levels in cigarettes, and the potential impact on Altria is currently unknown. These are just two examples of regulations; there will be more in the future. Another risk is fewer smokers. In the 2022 fourth quarter earnings call, management mentioned that they estimated a decline of 8% in total tobacco volumes in 2022. Altria reported that cigarette shipment volume decreased by 9.5%. Altria has been able to raise its prices as tobacco products have a lot of price elasticity, which has offset some of the decline.However, it is not something they can do forever, and there is concern that the decline of Altria is larger than that of the industry. Acquisitions are unsuccessful. Altria has made some unfortunate acquisitions over the years, with the most notable being their $13 billion investment in Juul, which they have now exchanged for heated tobacco property rights. Altria has also reported a reduction in the carrying value of Cronos and Anheuser-Busch. Hence, Altria has consistently overpaid for acquisitions, a trend that investors would like to see reversed in new acquisitions, such as their latest acquisition, NJOY (e-vapor).
There are also reasons to invest in Altria. One reason is that it is a huge moat company. It is no longer allowed to advertise tobacco products. Hence, it is unlikely that there will be many new competitors for Altria in the future. At the same time, Altria has Marlboro, which holds a 42,6 % market share in the United States. If you believe that there will continue to be smokers in the United States for many years and that they will be able to keep increasing prices, Altria has a significant advantage that will safeguard their business. Dividends and buybacks. Most people invest in Altria because of its high dividend. At the time of writing, Altria pays an annual dividend of $3,76 which translates to a dividend yield of over 8% based on today's share price. Furthermore, Altria has increased its dividend for the last 52 years in a row. It means that not only can you currently achieve a high yield, butit is also highly likely to increase in the future. Regarding buybacks, Altria's Board of Directors has authorized a $1 billion share repurchase program that is expected to be completed by the end of 2023. Growth in other segments. Altria expects to grow its oral tobacco segment moving forward. The shipment volume of On! and oral nicotine pouches increased by 70% from 2021 to 2022. I haven't been able to find the numbers for the United States specifically, but the global market for oral nicotine pouches is expected to grow at a CAGR of 35,7% until 2030.Hence, we can expect high growth in the United States as well. Furthermore, Altria also has a 45% stake in Cronos, which means that they have exposure to the cannabis industry. The U.S. cannabis market is expected to grow by 14,2 % CAGR until 2030. Finally, Altria also has exposure to alcohol through its 10% stake in Anheuser-Busch. However, management has stated that this investment is a financial investment, and their goal is to maximize the long-term value of the investment for shareholders. As I understand it, it means that they might sell it someday.
All right, we have gone through the numbers, potential and risk regarding Altria, and now it is time for us to calculate a price for Altria. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS of 3,19 (which is from 2022). I chose an estimated future EPS growth rate of 4,5% (management guided an EPS growth between 3-6%), an estimated future PE of 9 (which is double the growth rate, as the historical highest PE is higher), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $11,02. We want to have a margin of safety of 50%,so we will divide it by 2. This means that we want to buy Altria at a price of $5,51 (or lower, of course) if we use the Margin of Safety price.
Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating cash flow last year was 8.256. The capital expenditures were 205. I tried to look through their annual reportto see how much of the capital expenditures were used on maintenance. I couldn't find it, though. As a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 143,5 in our further calculations. The tax provision was 1.625. We have 1.786 outstanding shares. Hence, the calculation will be as follows:(8.256 - 143,5 + 1.625) / 1.786 x 10 = $54,52 in Ten Cap price.
The last calculation is the Payback Time. I also described in "MY STRATEGY". With Altria's Free Cash Flow Per Share at 4,49 and a growth rate of 4,5 %, if you want to recoup your investment in 8 years, the Payback Time price is $44,01.
I believe that Altria is a company with a significant competitive advantage. I also believe that the current CEO will do a better job than the former one. However, Altria is facing headwinds in declining volumes and potential regulations on menthol and nicotine levels. I don't like the high debt either. Compared to their competitors, Altria only has exposure to the U.S. market, which means they must only follow one set of rules and they are not exposed to foreign exchange rates. However, this also makes them more vulnerable as they are dependent on one market only. It is nice that Altria pays a high dividend and is buying back shares. Thus, Altria could be a good stock for dividend investors. However, I believe there are better options out there, which is why I'm not interested in buying shares in Altria.
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