Is the 7 % dividend a reason to add Altria to your portfolio?
Opdateret: 3. maj
Lately I have seen a lot of bullish analyses on Altria. The company is already in my portfolio but is it a good idea to add it now?
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 already own Altria in my portfolio. I bought it May 14th at $35,96. Personally, I do not smoke myself or use any other products that contain nicotine. However, as always I will keep my analysis objective.
Altria is mostly known as the parent company of Philip Morris USA, which means it sells all Philip Morris products in the United States, the most famous one being Marlboro. Besides selling various tobacco products such as cigarettes, cigars, oral tobacco products and innovative tobacco products, they also have around 10 % of the shares in Anheuser Busch (beer), 45 % of the shares in Cronos (cannabis) and 35 % of the shares in Juul (electronic cigarettes). Altria has two moats that is very easy to identify. First of all they have a brand moat when it comes to their products, as consumers trust brands like Marlboro. The other moat is a toll moat. It is forbidden to advertise for tobacco products in the United States, hence it is very unlikely that we will suddenly see new competitors entering the market.
Their CEO is Billy Gifford. He has been in Altria for more than 25 years and held positions such as vice chairman and CFO before becoming the CEO in 2020. As he is rather new to the job it is difficult to determine if he is a good CEO. However, I do like that he has a vast knowledge about the entire company, as he has had leadership roles different part of the company, such as strategy & 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 greater focus on the pursuit of our vision to responsibly transition adult smokers to a non-combustible future". There are several things I like about that statement. First of all, I of course like the focus on the value creation for shareholders but I also really like the vision in transitioning from cigarettes to non-combustible. It is still to early to say if we can trust the new management but I think we are off to a good start.
We have determined 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 for a good start. Now let us investigate the big five numbers in order to see if Altria does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. Altria does live up to the requirements in all of the benchmark. It is of course a little concerning that the numbers decrease but hopefully the momentum has turned in the latest benchmark. Nevertheless, the numbers are above the requirements and based on the ROIC, I would be happy to invest in Altria.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Obviously, this is not what you would like to see when investing in a company. There are no doubt that the amount of smokers in the United States is decreasing, which will hurt the sales growth rate for a company like Altria. It doesn't necessarily mean that you shouldn't invest in the company as a decrease in sales doesn't necessarily mean a decrease in profit, as tobacco companies can raise their prices due to the product they have.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Altria show disastrous numbers in most of the benchmarks. Obviously, the one year benchmark is an outlier and you cannot expect it to grow at these levels. While these numbers are bad, it doesn't mean you should stay away from a company like Altria, as the overall outlook is more important than one of the growth rates.
The Equity Growth Rate is also known as the most important of the four growth rates. Altria delivers in all of the benchmarks besides one. And the one they underwhelm in is very close to meeting the requirements. While the EPS growth rates might turn you away from an investment in Altria, an equity growth rate like this should make you intrigued. It certainly does that to me.
Finally we look into the Cash Growth Rates. It is sort of a mixed bag here. In some of the benchmark they show great numbers, and in others they are a bit underwhelming. Personally, I believe the numbers are fine if you look at them overall, and I wouldn't hesitate investing in Altria based on these numbers.
To shortly summarize the five numbers from Altria. The most important numbers will always be the ROIC, and when looking at it, Altria delivers numbers that you would like to see in any company you want to invest in. The equity growth rate is as it should be as well, while the cash growth rate is pretty fine without being impressing. The sales growth rate is as expected, as you will eventually see fewer and fewer smokers in the United States. The EPS growth rate is bad but if you look at all of the five numbers combined, I would still be confident in investing in Altria for the time being.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation in Altria, I can see that Altria has 6,26 years earnings in debt, which is above what I would prefer. However, as I wrote previously they have just sold off their wine business and will use the cash to pay off some debt. There are also some rumours that they will sell their stake in Anheuser Busch after the lockup in October and use the cash to pay off more debt.
I believe that Altria is an interesting company but like with all other companies you have some risks. One of the largest risk comes from the political environment. In the spring we first heard that some Democrats may wants to introduce a bill to increase taxes on cigarettes in a way to attempt to reduce tobacco usage, while the Biden administration also considers to ban menthol cigarettes, which would be a blow to Altria as well. However, these things are only speculations right now, and many states are in need of the taxes the generate on cigarettes, so it is far from a sure thing that these suggestions will come true. Another risk is less smokers. During the Q1 earnings, Altria reported that smokeable volume fell 11,6 %, which was above the 8,3 % consensus. In order to deal with Altria can raise their prices but even more important is that they can get these consumers to buy non-combustible products, as stated by their CEO. And in Q1 smokeless product volume was up 0,6 % which is better than the consensus - 2,7 % . One risk regarding their non-combustible products is their patent fight with British American Tobacco regarding the IQOS technology (heated tobacco system). Philip Morris / Altria lost the first round in the patent fight. The matter regarding the patent fight is schedules to be finished by September 15th, and it something worth monitoring. There are of course other risks regarding Altria, one is that we can only hope that the management won't make investments such as the previously management did in Juul, which has lost pretty much all its value since. As always I would recommend you to read through the annual report before investing in a company.
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. In order 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 a EPS at 2.35 (which is a bit on the cautious side if looking at the historical numbers). I chose a Estimated future EPS growth rate of 5 (which I believe it attainable), Estimated future PE 10 (which is the double of growth rate, as the historical highest PE is higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $9,73, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Altria at price of $4,73 (or lower obviously), 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". In order 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 8.385. The Capital Expenditures was 231. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 161,7 in our further calculations. The Tax Provision was 2.436. We have 1.850 outstanding shares. Hence, the calculation will be like this: (8.385 - 161,7 + 2.436) / 1.850 x 10 = $57,62 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 3,04 and a growth rate of 5 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $30,48.
I believe that Altria is a solid company with a huge moat. Obviously, there are a bit of risks when investing in a company like Altria. I mentioned quite a lot of them in this analysis but the management is still unknown as well, despite them having a strong start. Obviously, what attracts a lot of investors to Altria is the current juicy dividend of 7 %. Meaning if you are a dividend investor, Altria could be very appealing to you. We see quite a lot of difference in the three ways I do my calculations. I don't expect to increase my position in Altria but if I didn't have a position already, I would probably buy Altria if it goes below $40.
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