Altria Group (MO) is a tobacco products giant. Its core tobacco business holds the flagship Marlboro cigarette brand, explains income expert Ben Reynolds, editor of Sure Retirement.
Altria also has non-smokeable brands, Skoal and Copenhagen chewing tobacco, Ste. Michelle wine, and owns a 10% investment stake in global beer giant Anheuser Busch Inbev.
On 4/25/19, Altria reported first-quarter earnings that fell short of analyst expectations. Revenue declined by 6% year-over-year to $4.39 billion, missing expectations by $210 million.
Adjusted earnings-per-share meanwhile, came in at $0.90, missing expectations by $0.03. These declines were in large part driven by a steep 14.3% year-over-year decline in the smokeable segment cigarette shipment volume.
Altria has a reasonably positive growth outlook, although it does face a significant risk in the years ahead in the declining U.S. smoking rate.
In addition, there is new legislation in Congress that would raise the legal smoking age to 21, which analysts believe would reduce cigarette sales by 4% to 5% annually. In response to these trends, Altria has invested heavily in new products that appeal to changing consumer preferences.
Altria recently announced a $1.8 billion investment in Canadian marijuana producer, Cronos Group (CRON), purchasing a 45% equity stake in the company, as well as a warrant to acquire an additional 10% ownership interest in it. Separately, Altria announced it will invest $12.8 billion in e-vapor manufacturer JUUL Labs for a 35% equity stake in the company, valuing JUUL at $38 billion.
In early June, Altria announced that it took control of Burger Söhne, a Swiss company that makes oral nicotine pouches. This gives Altria another non-combustible product to diversify away from cigarette and cigar sales. The 80% stake was purchased for $372 million.
Altria receives top marks in terms of safety due to its competitive advantages. It operates in a highly regulated industry, which significantly reduces the threat of new competitors entering the market.
Furthermore, Altria’s products enjoy tremendous brand loyalty, as Marlboro controls more than 40% of U.S. retail market share. Altria is also highly resistant to recessions. Cigarette and alcohol sales fare very well during recessions, which keeps Altria’s strong profitability and dividend growth intact.
Altria stock trades for a price-to-earnings ratio of 12.1, which is below the 10-year average of 16.2. Our fair value estimate is now a price-to-earnings ratio of 15.0, a slight reduction in light of Altria’s recent lackluster results. Still, Altria stock appears significantly undervalued. An expanding valuation could boost shareholder returns by 4.4% per year.
In addition, we now expect 4% annual earnings growth for Altria through 2024, down from previous expectations as we acknowledge Altria’s heightened spending and its impact on growth. Nevertheless, Altria has a high dividend yield of 6.3%, and a strong total expected return of 14.7% per year over the next five years.
