Why Financial Pros Search This Eroding Business

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Smoking is in perpetual decline in America.

In the year 1965, 50.1 million U.S. adults smoked. Today, it’s less than 20 million.

So, why do financial pros keep searching out Altria (MO)?

The company is a cash cow, pumping out $8.8 billion in free-cash-flow per year, or $5.35 per share.

Between dividends and buybacks, it yields a bit more than 10% each year.

But with $27 billion in debt and slowing growth, is 10% safe and worth your money?

Altria’s Business

Creators of the Marlboro Man, Altria Group, is one of the largest players in the tobacco industry, with its hands in cigarettes, cigars, smokeless tobacco, and oral nicotine pouches. In 2008, they split from Phillip Morris, which took the international portion of the business. Altria primarily serves the U.S. market. 

What many people don’t know is that the company also holds interests in wine, beer, cannabis, and e-cigarettes through stakes in Anheuser-Busch InBev, Cronos Group, and JUUL Labs.

The company segments its business as follows:

• Smokeable Products (85% of total revenues) – Production and sale of cigarettes and cigars, the backbone of the company’s earnings.
• Oral Tobacco Products (10% of total revenues) – Encapsulates moist smokeless tobacco and oral nicotine pouches, with products like on!, showing promising growth.
• Wine (2% of total revenues) – Features premium wines sold under various brands, reflecting the company’s diversification strategy.
• Other (3% of total revenues) – Investments in companies like Anheuser-Busch InBev, Cronos Group, and JUUL Labs, and corporate expenses, showcasing Altria’s reach into different markets.

Despite a massive writeoff in Juul several years ago, Altria’s done well stabilizing its business, leveraging price increases to improve sales and margins.

Financials

Source: Stock Analysis

Revenues typically grow primarily due to price increases, not higher volumes. The company hoped its investments in cannabis and Juul would drive new growth. Unfortunately, the legal system got in its way.

Notably, margins improved over the last decade by almost 10% from gross  down to profit margin.

While the company holds $26.3 billion in net debt, it pays less than 4%, easily payable with its cash flow.

Valuation

Source: Stock Analysis

Despite the high dividend payout, Altria trades at a low P/E and price-to-cash flow ratio, even compared to many of its peers.

Phillip Morris (PM), the international arm, trades at higher multiples despite having similar growth. Other peers like British American Tobacco Institute (BTI) trade at lower multiples and demonstrate higher revenue growth.

Growth

Source: Seeking Alpha

Vector Group Ltd (VGR) pulled in the highest revenue growth last year. However, it’s been struggling over the last several.

Turning Point Brands (TPB) and MO both saw revenue decreases last year. However, MO expects to temper those in 2023.

Profitability

Source: Seeking Alpha

Altria’s margins are the best across the board. That’s interesting, given the discount it trades at relative to several competitors.

Our Opinion 9/10

Social issues aside, Altria trades at a nice discount. 

Management is very shareholder friendly and expects to cover share buybacks and the 8.5% dividend without a problem.

Will this stock double anytime soon?

Unlikely. But it should offer steady returns for a long-term investor.

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