Altria Group Inc.
About the company
Virginia (USA)-based company, Altria Group Inc. is one of leading tobacco corporations in the world. With net revenue of $24.5 billion in 2014 the company has following wholly-owned subsidiaries: (i) Philip Morris USA Inc., (ii) John Middleton Co. (iii) U.S. Smokeless Tobacco Company LLC, (iv) Ste. Michelle Wine Estates Ltd., (v) Nu Mark LLC and (vi) Philip Morris Capital Corporation. In addition, Altria Group, Inc. approximately 27% of the economic and voting interest in one of the world’s largest brewing companies, UK based SABMiller plc, where it has 3 seats on the 14-person board of directors (“Independence” http://www.sabmiller.com/about-us/corporate-governance/board-composition & “Who we are” http://www.sabmiller.com/about-us/who-we-are). Philip Morris International was spun off in 2008.
Philip Morris USA was established in 1847. More than 150 years later, it is the leading manufacturer of cigarettes in the United States (a position they held since 1983). It produces some of the most well-known brands in the consumer products industry. Marlboro leads the cigarette product portfolio. In 2014, Marlboro’s retail share was 43.8% in USA, larger than the next 10 cigarette brands combined. It also manufactures other strong cigarette brands, including Parliament, Virginia Slims and L&M. These brands are among the nation’s best-selling cigarette brands. In 2014, PM USA’s retail cigarette share was 50.9%. (http://www.altria.com/our-companies/philipmorrisusa/about-philipmorris-usa/Pages/default.aspx)
Established in 1856, John Middleton is a leading manufacturer and marketer of pipe tobacco and cigars. Their Black & Mild brand is the second-largest selling large machine-made cigar in the U.S. In 2014, the company’s total retail share was 29%. Middleton also manufactures pipe tobacco with brands including Prince Albert, Carter Hall and Middleton’s Cherry Blend. (http://www.altria.com/our-companies/johnmiddleton/about-johnmiddleton/Pages/default.aspx)
Established in 1822, U.S. Smokeless Tobacco Company (USSTC) is the leading producer and marketer of the moist smokeless tobacco, one of the fastest growing tobacco segments in the United States. Copenhagen leads the moist smokeless tobacco product portfolio. In 2014, it was the number one premium moist smokeless tobacco brand in the United States, and Skoal, USSTC’s other leading brand, was the number two premium brand. Copenhagen and Skoal achieved 30.8% and 20.4% retail share respectively in 2014. In 2014, USSTC had 6 of the top 10 SKUs in the smokeless tobacco category. Other brands include Red Seal and Husky. (http://www.ussmokeless.com/en/cms/Company/Market_Information/default.aspx)
Founded in 1934, Woodinville, Washington-based Ste. Michelle Wine Estates Ltd. produces and markets wines. The company offers red, white, and sparkling wines through distributors worldwide. Ste. Michelle Wine Estates Ltd. has a strategic alliance with Antinori. It operates wineries in Washington, California, and Oregon. Ste. Michelle Wine Estates Ltd. operates as a subsidiary of UST LLC. (http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=705954)
Nu Mark LLC is engaged in developing and marketing innovative tobacco products for adult tobacco consumers. It sells an e-vapor brand called MarkTen. In April 2014, Nu Mark acquired Green Smoke Inc. and its affiliates for a total purchase price of up to approximately $130 million, which includes contingent consideration. This acquisition enhances Nu Mark’s competitive position by adding e-vapor experience, broadening product offerings and strengthening supply chain capabilities. (http://www.nu-mark.com/about-us/our-story/Pages/default.aspx)
Philip Morris Capital Corporation maintains a portfolio of finance assets, substantially all of which are leveraged leases. (“General Development of Business, Form 10-K”, 2014)
With more than 20 years at Altria Group, Martin J. Barrington, Chairman, Chief Executive Officer and President of Altria Group, Inc., has served in numerous executive roles – business and legal, domestic and international – for virtually all the companies in the Altria family. William F. Gifford, Jr. is the Chief Financial Officer and has around 10 years of experience at Altria Group.
Altria Group’s 2014 net revenues were $24.52 billion, nearly same as in 2013 ($24.47 billion). However, net profit significantly increased by 12% y-o-y to $5.07 billion in 2014 from $4.54 billion in 2013. This increase was mainly attributable to (i) reduced interest and other debt expense resulting from debt maturities in 2013 and 2014, as well as debt refinancing activities in 2013 and (ii) very less loss on early extinguishment of debt. In 2014 the loss on early extinguishment of debt was only $44 million, in contrast to $1.08 billion in 2013. 2014 EBITDA was at $8.84 billion, up by 8% y-o-y ($8.21 in 2013). (https://www.stock-analysis-on.net/NYSE/Company/Altria-Group-Inc/Valuation/EV-to-EBITDA)
For 2014 the basic and diluted earnings per share rose to $2.56 from $2.26 in 2013. Dividend per share has grown with CAGR of 8.9% to $2.08 in 2014 from $1.36 in 2009. The company expects to continue to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. The current annualized dividend rate is $2.08 per Altria Group, Inc. common share.
During 2014, 2013 and 2012 the Board of Directors authorized Altria Group, Inc. to repurchase shares of its outstanding common stock under several share repurchase programs. Altria Group, Inc.’s total share repurchase activity was as follows:
||For the Years Ended December 31
|(in millions, except per share data)
| Total number of shares repurchased
| Aggregate cost of shares repurchased
| Average price per share of shares repurchased
The total outstanding debt as on December 31, 2014 was $14.69 billion ($14.52 in 2013). The total cash and cash equivalents were at $3.32 billion as compared to $3.18 in 2013.
(10-K, 2014. http://www.sec.gov/Archives/edgar/data/764180/000076418015000022/a2014form10-kq42014.htm#s9AFD9B88CD4E1CA9DE2575F111F763B8)
Altria Group, Inc.’s reportable segments are smokeable products, smokeless products and wine. The financial services and the innovative tobacco products businesses are included in an all other category due to the continued reduction of the lease portfolio of PMCC and the relative financial contribution of Altria Group, Inc.’s innovative tobacco products businesses to Altria Group, Inc.’s consolidated results. (“Form 10-K”, 2014)
Basic stock information
Altria Group Inc. is listed on the New York Stock Exchange and trades under the ticker symbol “MO”. As on March 20, 2015 the company has market capitalization of $101.14 billion and enterprise value of $112.51 billion. With 52-Week high price at $56.7 and 52-Week low price at $36.44 the share price closed at $51.42, soared by 41% from $36.45 as on March 20, 2014.
As per trailing twelve months (as of Dec 31, 2014) Return on Assets was 14.17% and Return on Equity was 140.87%. As per most recent quarter (as of Dec 31, 2014) the ratio of Total Debt to Equity was 482.53 and Current Ratio was 1.11.
(Yahoo Finance. http://finance.yahoo.com/q/hp?s=MO)
On March 12, 2014 Standard & Poor’s had upgraded Altria Group Inc. to a rating of BBB+ from BBB. S&P also assigned a stable outlook in the upgrade. This upgrade was on the back of Altria’s substantial financial flexibility, pricing power and a solid position from its approximately 27% SAB Miller stake. (“Altria Gets Smoking Upgrade From S&P”, March 12, 2014. http://247wallst.com/consumer-products/2014/03/12/altria-gets-smoking-upgrade-from-sp/)
The tobacco industry comprises those persons and companies engaged in the growth, preparation for sale, shipment, advertisement, and distribution of tobacco and tobacco-related products. It is a global industry; tobacco can grow in any warm, moist environment, which means it can be farmed on all continents except Antarctica.
Tobacco, one of the most widely used addictive substances in the world, is a plant native to the Americas and historically one of the half-dozen most important crops grown by American farmers. Tobacco is an agricultural commodity product, similar in economic terms to agricultural foodstuffs: the price is in part determined by crop yields, which vary depending on local weather conditions. The price also varies by specific species or cultivar grown, the total quantity on the market ready for sale, the area where it is grown, the health of the plants, and other characteristics individual to product quality.
There is no denying the fact that in spite of a global economic downturn, lawsuits, health problems, and rising prices of cigarettes, the global tobacco industry has continued to generate strong growth as well as profits. Many legal problems continue to plague the global tobacco industry as governments around the world continue to put in place strict regulations to curb the use of tobacco. The health impacts of tobacco are many and many smokers are suffering from cancer or other side effects of tobacco consumption. (“Analyzing the Global Tobacco Industry”, 2015 /PRNewswire. http://www.prnewswire.com/news-releases/analyzing-the-global-tobacco-industry-300024309.html)
The market for smokeless tobacco has grown into a multi-billion dollar a year industry with millions of users choosing an alternative to traditional cigarettes. Whether it’s chewing tobacco, snuff, or the newest trend in vaporizing, new users are finding ways to cut the smoking habit and chose a “better” alternative. A report from Research and Markets shows that sale of e-cigs in the United States, estimated to now be a $1.5 billion market, are set to grow 24.2% per year through 2018. In addition to that, Euromonitor International data finds that the number of traditional cigarettes sold in the United States has fallen nearly 30% since 2004 supporting the shift in smokeless alternatives. (“Companies Not Blowing Smoke When It Comes To Growth In The Smokeless Tobacco Industry”, 2015. http://www.hawaiinewsnow.com/story/28561858/companies-not-blowing-smoke-when-it-comes-to-growth-in-the-smokeless-tobacco-industry)
Leading 10 tobacco companies worldwide in 2014 are as follows. This ranking depicts the leading 10 tobacco companies worldwide in 2014, based on net sales. In that year, Philip Morris International was the leading tobacco company worldwide with about $30.9 billion worth of sales. (“Leading 10 tobacco companies worldwide in 2014, based on net sales (in billion U.S. dollars)”. http://www.statista.com/statistics/259204/leading-10-tobacco-companies-worldwide-based-on-net-sales/)
Quota Buyout Expiration:
Since the institution of the Fair and Equitable Tobacco Reform Act of 2004, the federal tobacco quote and price support system has been replaced by an industry-funded buyout of tobacco growers and quota holders. The resulting decade of buyouts has cost the tobacco industry about $10 billion, but the buyouts came to an end in 2014.
Starting in 2015, the elimination of buyout payments will reduce annual operating costs at Altria Group Inc by about $300 million, at Reynolds American, Inc. by about $160 million and at Lorillard Inc. by about $95 million.
Morgan Stanley analysts see four possible uses for the savings that will result from the end of the buyout:
- Increase volumes by cutting costs
- Realize an up to 5% boost in 2015 earnings
- Invest further in the development of e-cigarettes and other technologies
- Utilize greater operational flexibility to achieve accretion targets
As per World Economic Outlook Update, January 2015 the global growth in 2015–16 is projected at 3.5 and 3.7%, downward revisions of 0.3% relative to the October 2014 World Economic Outlook (WEO). The revisions reflect a reassessment of prospects in China, Russia, the euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices. The United States is the only major economy for which growth projections have been raised.
The main upside risk is a greater boost from lower oil prices, although there is uncertainty about the persistence of the oil supply shock. Downside risks relate to shifts in sentiment and volatility in global financial markets, especially in emerging market economies, where lower oil prices have introduced external and balance sheet vulnerabilities in oil exporters. Stagnation and low inflation are still concerns in the euro area and in Japan
Unites States – Growth is projected to exceed 3% in 2015–16, with domestic demand supported by lower oil prices, more moderate fiscal adjustment, and continued support from an accommodative monetary policy stance, despite the projected gradual rise in interest rates. But the recent dollar appreciation is projected to reduce net exports.
Euro Area – The recovery is projected to be somewhat slower than forecast in October, with annual growth projected at 1.2% in 2015 and 1.4% in 2016.
In emerging market and developing economies, growth is projected to remain broadly stable at 4.3% in 2015 and to increase to 4.7% in 2016—a weaker pace than forecast in the October 2014 WEO.
(“World Economic Outlook Update”, January 2015. https://www.imf.org/external/pubs/ft/weo/2015/update/01/pdf/0115.pdf)
- Dividend Capitalization – Single Period Share Valuation Method
It is a model where we determine the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends.
Stock Value Po = D / (k – G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
- In case of Altria, we expect the share price to grow by 5% at the end of one year. So G is equal to 5%.
- The company has declared to maintain a dividend payout ratio of approximately 80% of adjusted diluted EPS. Basic and diluted earnings per share for 2014 were $2.56. So we assume dividend to be distributed in 2015 equals to $2.048 (80% of $2.56).
- Required rate of return for equity investor is equal to 7.54% This is calculated using Capital Asset Pricing Model
E(R) = RFR + βstock (Rmarket – RFR)
- E(R) = the required rate of return, or expected return
- RFR = the risk free rate
- βstock = beta of the stock
- (Rmarket – RFR) = the market risk premium
|Beta of stock
|Market risk premium
|Required rate of return (k)
Therefore, stock value is equal to:
|Expected dividend in 2015 (D)
|Constant growth (G)
|Required rate of return for equity investor (k)
|Present value of Stock (P0)
- Dividend Capitalization – Multi-Period Share Valuation Method
Given investors can hold a common stock for over a year, it is useful to value a stock over the investor’s expected holding period. In this case, the below model can be used.
Value of common equity = D1 / (1+k)1 + D2 / (1+k)2 + D3 / (1+k)3+…… Dn / (1+k)n
Presently the share price of Altria is $51.42 and we expect it to increase at an annual rate of 5%. Further, we assume that the expected dividend to grow at a rate of 8% p.a. Suppose the opportunity cost of capital is 7.5%.
||Present values of dividend stream
||Present values of future Share Price
|Present value of the stream of dividends is (A)
|Present value of the share price at the end of five years is (B)
|Hence, the total present value of the share is (A+B)