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Altria: A company with a significant competitive advantage and a high dividend yield.

Opdateret: for 1 dag siden

Altria is a company that possesses a significant competitive advantage and provides a generous dividend payout. However, the company is also 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 copy trading 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 a highly user-friendly platform that allows you to get started on investing with as little as $100.

Altria Group was previously known as Philip Morris Companies. Altria Group, through its subsidiaries (Philip Morris USA, John Middleton, U.S. Smokeless Tobacco Company, and Philip Morris Capital Corporation), manufactures and sells smokeable and oral tobacco products in the United States. The company offers cigarettes primarily under the Marlboro brand; large cigars and pipe tobacco under the Black & Mild brand; moist smokeless tobacco and snus products under the Copenhagen, Skoal, Red Seal, and Husky brands; and oral nicotine pouches under the on! brand; and e-vapor products under the NJOY ACE brand. It sells its products to distributors as well as large retail organizations, such as chain stores. Altria also owns approximately 10% of the shares in Anheuser-Busch (beer) but plans to sell some of its shares to finance the repurchase of their own shares. Altria also owns a share in Cronos (cannabis). Altria previously owned 35% of Juul, a company that manufactures electronic cigarettes. 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 as Marlboro. The other moat is a toll moat. In the United States, advertising tobacco products is prohibited. Hence, it is highly unlikely that we will see new competitors entering the market.

The CEO is Billy Gifford. He has been with Altria for over 25 years, serving in various roles including Vice Chairman and CFO, before assuming the position of CEO in 2020. Prior to joining Philip Morris USA, he worked at the public accounting firm of Coopers & Lybrand, which is now known as PwC. I appreciate his extensive knowledge of the entire company, acquired through his leadership roles in various departments such as strategy and business development, finance, marketing, and consumer research. Personally, I also like that he has sold Ste. Michelle Wine Estates business for $1,2 billion meaning that Altria is no longer involved in the wine industry. 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 emphasis on creating value for shareholders, and I am also impressed by the vision of transitioning from cigarettes to non-combustible alternatives. Billy Gifford has an employee rating of 74/100 at Comparably, which places him in the top 20% of companies of similar size. We don't have much information about Billy Gifford, but I appreciate his extensive experience in the company and the industry. I also value the fact that he sold the Ste. Michelle Wine Estates business. Thus, I am confident in Billy Gifford leading Altria moving forward.

I believe that Altria has a brand moat and a toll moat. I also like the management. 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 represent, you can refer to "MY STRATEGY" on the website.

The first number we will look into is the return on invested capital, also known as ROIC. We require a 10-year history, with all figures exceeding 10% for each year. Historically, Altria has delivered impressive numbers well above the required 10%. However, the Return on Invested Capital (ROIC) dropped below 30% in 2018 and did not exceed 30% until 2023. Moreover, during this period, there was a year with a negative ROIC. However, the numbers are affected by the Juul acquisition, the pandemic, and macroeconomic factors. Thus, it is encouraging that Altria has managed to achieve a ROIC of over 30% once again in 2023, and hopefully, this trend will continue.

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 actual numbers and the year-over-year percentage growth. The numbers are a bit mixed as there have been many years where the equity has decreased. 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. Furthermore, the numbers suggest that Altria has used inexpensive debt to buy back shares. However, it is encouraging to see that equity increased in 2023, marking the first increase since 2018.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to see that Altria has consistently generated a positive free cash flow in each year over the past decade. It is encouraging that Altria delivered its highest free cash flow in 2023. Levered free cash flow margin has consistently been high in the past decade, especially since 2018, when it reached a peak level. It is encouraging that Altria delivered its highest levered free cash flow margin in 2023 as well. Finally, the free cash flow yield is also at its highest level in the past decade, which suggests that the shares are trading at an inexpensive valuation. However, we will revisit this later in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has 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. Upon calculating Altria's financials, I have determined that the company has 3,1 years of earnings in debt, slightly exceeding the three-year threshold. On a positive note, the debt is the lowest it has been in five years, and being 0,1% above the threshold won't deter me from investing in Altria.

As with all other investments, there are risks associated with investing in Altria. One of the major risks is the high level of regulation in the tobacco industry. Right now. Altria faces several new regulations. The Biden administration, for example, 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%. The European Union (EU) and the United Kingdom (UK) previously banned menthol cigarettes, leading to most menthol smokers switching 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 a decrease in the number of smokers. In the 2023 fourth-quarter earnings call, management mentioned that they estimated an 8% decline in total tobacco volumes for 2023. Altria reported that cigarette shipment volume decreased by 9,9%. Altria has been able to raise its prices because tobacco products have a high price elasticity, which has helped 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. Especially because Altria's smokable products still generate approximately 89% of the revenue and 92% of the operating income. Illicit products. Management has expressed deep concern about the increase in illicit product use. For instance, the e-vapor category grew by approximately 35% in 2023. However, management believes that the category growth was largely driven by illicit flavored disposable products, which they estimate represent over 50% of the category, mainly due to illegal flavored disposable e-vapor products. Furthermore, management has mentioned that they continue to believe that the current state of the e-vapor market is intolerable for both legitimate manufacturers and consumers. Management has mentioned that the recent proliferation of illicit products is also affecting the combustible segment, which may account for the significant decline in 2023.

There are also reasons to invest in Altria. One reason is their smoke-free segment. Altria's smoke-free portfolio consists of oral tobacco, heated tobacco, and e-vapor. The oral tobacco industry continues to grow in the United States, and Altria is taking advantage of this trend with its nicotine pouch, On!, which experienced a 39% increase in shipment volume in 2023. In heated tobacco, Altria is actively making regulatory preparations to introduce heated tobacco stick products to the U.S. market through Horizon, their joint venture with Japan Tobacco. Management believes that heated tobacco products can play an important role in achieving harm reduction; however, the category remains nonexistent in the United States. Thus, there is plenty of room for Altria's Horizon product to grow once it is introduced. Finally, Altria has just acquired the e-vapor company NJOY in 2023, which indicates that Altria is poised to capture a portion of the rapidly expanding e-vapor market. The U.S. e-vapor market is expected to grow at a 29,8% compound annual growth rate (CAGR) until 2023. A huge moat. 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 owns Marlboro, which commands a 42,2 % market share in the United States. Despite the declining volume of the combustible business, it remains highly profitable, boasting an operating margin of 59,9%. Thus, 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 its highly profitable business. Dividends and buybacks. In 2024, Altria will pay an annual dividend of $3,92, which, at the time of writing this analysis, is above 9%. Altria has just increased its dividend, marking its 58th increase in the last 54 years. Thus, if Altria continues to increase its dividend, the current dividend yield will be even higher in the future if you buy shares now. Additionally, Altria also repurchases shares. Altria bought back $1 billion worth of shares in 2023 and has approved another $1 billion buyback program in 2024. Furthermore, Altria will sell some of its shares in Anheuser-Busch and use the proceeds for additional share repurchases.

Now it is time to calculate the share price of Altria. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,57, which is from the year 2023. I have selected a projected future EPS growth rate of 3%. Finbox expects EPS to grow by 1,9% in the next five years, but management believes it will reach mid-single digits, so I'm more optimistic. Additionally, I have selected a projected future P/E ratio of 6, which is double the growth rate. This decision is based on Altria's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $9,11. 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 $4,56 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 9.287, and capital expenditures were 196. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 137 in our calculations. The tax provision was 2.798. We have 1.763,462 outstanding shares. Hence, the calculation will be as follows: (9.287 – 137+ 2.798) / 1.763,462 x 10 = $67,75 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Altria's free cash flow per share at $5,14 and a growth rate of 3%, if you want to recoup your investment in 8 years, the Payback Time price is $47,08.

I believe that Altria is a company with a significant competitive advantage. I am also confident in management. Altria has recently achieved a high Return on Invested Capital (ROIC) and has consistently maintained a high levered free cash flow margin. However, there are several challenges associated with investing in Altria. The industry is highly regulated, and Altria will probably continue to face regulations moving forward. It is impossible to predict how these future regulations will affect the company. Furthermore, Altria generates a significant portion of its revenue from the smokable segment, which is experiencing a continuous decline that is likely to persist year after year. As it stands, illicit products will affect Altria's growth in the e-vapor market, which is the fastest-growing non-smoking product segment. Illicit products also impact Altria's smokable products, which is particularly noticeable in California. Altria's management has noted that a significant number of former menthol smokers have shifted to illicit products imported from Mexico instead of non-menthol cigarettes. However, it isn't all bad. Altria is expanding its oral tobacco products, and with the acquisition of NJOY, they are poised to gain market share in the rapidly growing e-vapor industry. Additionally, the introduction of its heated tobacco product may address a current gap in the market in the United States. Management seems encouraged and has mentioned that they are committed to achieving long-term leadership in each of the smoke-free categories while delivering strong shareholder returns. Altria has a moat that protects its highly profitable smokable segment, and this moat will likely endure as long as there are smokers in the United States. Altria shares are currently trading at a high dividend yield, and the company consistently increases dividends. This suggests that purchasing shares now could result in even higher yields in the future. Nonetheless, I personally believe that there are better investments than Altria, so I will not be buying shares at this point.

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