Altria: A large moat and high dividend paying company.
Opdateret: 29. jan.
Altria is a company that has a large moat and pays a high dividend. However, it is also a company that is facing some risks that they will need to overcome. The question is if 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 Altria but decided to sell my shares. Instead, I own British American Tobacco in my dividend portfolio. You cannot copy my dividend portfolio, as I have it at Degiro for tax purposes. If you would like to see or copy my copytrading portfolio, you can see how to do so here. Even though I have sold Altria and bought British American Tobacco, I will keep this analysis unbiased.
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. It also means that Altria only have exposure to the U.S. market. 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. I 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 too early to say if we can trust the new management but I think 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 for a good start. Now let us investigate the numbers to see if Altria does live up to 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 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 years. Historically, Altria has delivered some great numbers well above the required 10 %. However, since 2017 the numbers are much lower than what we have been used to. 2019 was a bad year but else Altria has delivered above or close to the 10 % that is required. Nevertheless, the decreasing ROIC is something that should be monitored moving forward if you are considering investing in Altria.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. It is not exactly the development that you would like to see. Ever since 2018 the book value + dividend has decreased significantly. One reason it has decreased is that Altria has reported a reduction in the carrying value of Juul, Cronos, and Anheuser-Busch. Altria will not continue reduce the carrying value of these investments and hopefully it means that book value + dividend will increase moving forward. Nevertheless, these are not encouraging numbers.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. These numbers are much more encouraging. Altria makes a lot of cash and reached their highest number the last 10 years in 2021. It is encouraging to see Altria generating this amount of cash. Furthermore, the free cash flow yield looks attractive as Altria's market cap has dropped.
Another important thing to investigate 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 earnings. Doing the calculation in Altria, I can see that Altria has 10,93 years earnings in debt, which is way above of what I feel comfortable about. I would need a good reason to invest in a company with this amount of debt.
Like with all other investments, there are some risks if you decide to invest in Altria. One of the largest risks are that the tobacco industry is highly regulated. Right now. Altria face several new regulations. For example, the Biden administration would like to ban menthol cigarettes. It is difficult to predict how a ban of menthol cigarettes will affect Altria but in their latest earning call they mentioned that their share of menthol is 9,4 %. EU and UK previously banned menthol cigarettes and most menthol smokers switched to non-menthol cigarettes, but it doesn't mean the same will happen in the United States. The Biden administration would also like to cut nicotine in cigarettes, and it is unknown how it will affect Altria if it happens. These are just two examples of regulations, there will be more in the future. Another risk is less smokers. In the first quarter in 2022, Altria reported that over the last 2 years, we have seen an adjusted cigarette decline of 4,5 % in the industry. And for Altria it has been even worse, as they adjusted cigarette decline has been 5,5 % over the last 2 years. Altria has been able to raise their prices as tobacco products has a lot of price elasticity, which has offset the decline. However, it is not something they can do forever, and it is concerned that the decline of Altria is larger than the industry. FDA bans Juul. Altria has a 35 % stake in Juul. Hence, FDA denying authorization to market Juul products is a huge blow to Altra. Juul was Altra's vapor bet and one of their growth catalysts of their non-smokable products moving forward. And while Altria just acquired Poda, it still means that Altria will need to catch up with other companies that have approved vapor products such as British American Tobacco.
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 for tobacco products. Hence, it is unlikely that there will be a lot of new competitors for Altria moving forward. At the same time, Altria has Marlboro, which has a 42,6 % market share in the United States. If you believe that there will be smokers in the United States for many years to come and that they are able to continue to rise prices, Altria has a huge moat that will protect their business. Dividends and buybacks. Most people invest in Altria because of the high dividend. At the time of writing, Altria pays an annual dividend of $3,60 and at today´s share price it means more than an 8 % dividend yield. Furthermore, Altria has increased their dividend the last 52 years in a row. It means that not only can you get a high yield now, it will most likely also increase moving forward. Regarding buybacks, Altria still has $1,2 billion left of their $3,5 billion share repurchase program, and they expect to complete the program by the end of 2022. Growth in other segments. Altria expects to grow their oral tobacco segment moving forward. The shipment volume of On! and oral nicotine pouches nearly doubled year over year in the first quarter of 2022. I haven't been able to find the numbers for the United States only, but the global oral nicotine pouches market is expected to grow by 31 % CAGR until 2028. Hence, we can expect high growth in the United States as well. Furthermore, Altria also has a 45 % stake in Cronos, meaning that they have exposure to cannabis. The U.S. cannabis market is expected to grow by 14,9 % CAGR until 2030. Finally, Altria also has exposure to alcohol through their 10 % stake in Anheuser-Busch. However, management has stated that this investment is a financial investment, and their goal is to maximize long-term value of the investment to shareholders. As I understand it, it means 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 at 2,42 (which is the one from 2020. 2021 was slightly lower but management guided higher). I chose an Estimated future EPS growth rate of 5,5 (management guided an EPS growth between 4-7 %), Estimated future PE 11 (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 $11,24, 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 $5,62 (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". 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 8.405. The Capital Expenditures was 169. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't 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 118,3 in our further calculations. The Tax Provision was 1.349. We have 1.845 outstanding shares. Hence, the calculation will be like this: (8.405 - 118,3 + 1.349) / 1.845 x 10 = $52,22 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 3,12 and a growth rate of 5 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $32,02.
I believe that Altria is a company with a huge moat. I also believe that the current CEO will do a better job than the former one. However, Altria is facing some headwind that makes be a bit cautious about the company. While potential menthol ban and lower nicotine levels will hurt all tobacco companies, the Juul ban is something that will hurt only Altria. It means they will need to play catch up with their largest competitors, which is something I don't like. I don't like the high debt either. Altria is currently paying a higher dividend yield than their two largest competitors Phillip Morris and British American Tobacco. Furthermore, Altria only has exposure to the U.S. market. Some see this as an advantage, as they only need to follow one set of rules while others see it as a disadvantage, as they are dependent on one market only. If you want a higher dividend and believes it is an advantage that Altria only has exposure to one market, Altria could be something you should investigate. Personally, I believe there are better options out there.
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