Altria Group Inc. (NYSE: MO) has two prospects for future growth and improved earnings. As a tobacco company, particularly one that does business domestically, it faces a sharp falloff in smoking. This has been a trend in the United States for decades.
Altria decided to hedge traditional tobacco industry bets. It made a $12.8 billion investment in Juul, the electronic cigarette company. That put Juul’s to-date value at $38 billion. If people would not smoke cigarettes, it appeared they would use “less dangerous” e-cigarettes.
Since the investment, Juul has been clobbered by federal regulators, which leaves its U.S. revenue in jeopardy. It also crippled Juul’s valuation.
What’s Wrong With the Cigarette Business?
The tobacco world can be divided into two parts. First, there is America, and a few other developed nations, where large numbers of people have stopped smoking. This is due to both regulation and health reasons.
One reason cigarette sales have tumbled in the United States is one simple statement from the Centers for Disease Control and Prevention (CDC): “Tobacco use is the leading cause of preventable disease, disability, and death in the United States.” The problem is so severe that big pharma makes hundreds of millions of dollars on treatments to help people stop.
Over 42% of American adults smoked in 1965. That figure dropped to 14% in 2017.
The other tobacco world is primarily in the developing and undeveloped nations. Altria essentially gave this up when it spun off Philip Morris in 2017. Tobacco lawsuits in the United States were so severe that investors wanted a tobacco “pure play” not plagued by legal issues. Philip Morris’s businesses were overseas.
Altria’s revenue has grown at a very slow pace recently. In its most recently reported quarter, revenue was $6.86 billion, up from $5.29 billion in the same quarter a year earlier. Per-share earnings were $1.19, compared with $1.08 the year before.
The numbers were in line with analysts’ expectations. However, Altria had to take a write-down of $4.5 billion on the Juul deal.
For the full year, 2019 revenue was $25.1 billion. That was down from $25.4 billion in 2018 and $25.6 billion in 2017. Due to the Juul write-off, it is best to look at operating income for a picture of the three years. The figure was $10.3 billion last year, $9.1 billion in 2018 and $9.5 billion in 2018.
The figures are a perfect example of the extent to which tobacco use has flattened in the United States.
What Does Altria Do?
There are two answers to this question, and both are pertinent to any look at the company.
For decades, Altria was America’s tobacco giant. The firm was previously known as Philip Morris. Its primary product and brand, which accounted for the lion’s share of its sales, was Marlboro.
Philip Morris diversified to expand its portfolio beyond tobacco. It bought the brewer Miller in 1970, General Foods in 1985 and Kraft in 1988. In 2008, Philip Morris was spun out to be the holder of international assets and sales. At that point, Philip Morris International also became its own publicly traded company.
Ironically, late last year Philip Morris International and Altria began merger plans that would have put most of the old company back together. Those plans were quickly abandoned.
In its “second incarnation,” Altria’s revenue comes primarily from Philip Morris USA. Marlboro continues to be its primary brand. Marlboro sales represent 43% of all cigarette sales in the United States. Altria makes the point that this is more than the sales of the next eight domestic brands combined.
Altria also owns U.S. Smokeless Tobacco, John Middleton, Nat Sherman and Ste. Michelle Wine Estates. It employs 7,300 people.
The latest major move by Altria management was that investment in Juul. The strategy was based on the huge and rapidly growing market for e-cigarettes. Many in the industry assume these devices would cut into cigarette sales, particularly among teenagers and young adults. Juul Labs was created in 2017.
Juul had close to three-quarters of the U.S. e-cigarette market at the end of 2018. The federal government became concerned, among other reasons, because of wide e-cigarette use by minors.
The U.S. Food and Drug Administration (FDA) began a major investigation. Juul eventually stopped selling some of the flavors of its e-cigarettes. It said it would also stop using social media to market its products.
Recently, the U.S. Securities and Exchange Commission (SEC) began an investigation into Altria’s Juul investment. Many state attorneys general have started similar probes.
What has become clear recently is that the Juul strategy has collapsed.
One Very Good Thing About Altria
Altria is one of the market’s great “safe haven” stocks. It pays an annualized dividend of $3.36 per share, which makes its yield an extraordinary 7.67%. Such a yield normally would be attached to a relatively risky investment. However, Altria is cash rich. Its free cash flow last year was $7.5 billion.
Altria paid $25 billion in dividends between 2015 and 2019. It bought back $7 billion of its shares over the same period. Altria routinely increases its dividend as well.
Critics complain that Altria pays large dividends and buys stock because it has no M&A or product development work for its capital. For investors who want to own shares in a company that is likely to be in business and pay dividends long term, Altria is close to perfect.
Altria Management and Board Paid Well
Altria’s stock is down 32% in the past two years. In that time, the S&P 500 is up over 23%. Nevertheless, the Altria board of directors and senior management have done remarkably well financially.
Altria has 11 directors. Several have been on the board for over a decade. The list includes Dinyar S. Devitre, the former chief financial officer. Howard A. Willard III is the board chair and chief executive officer, and he joined the board in 2018.
Each member of the board made more than $300,000 in 2018.
For the purposes of setting pay for senior management, the board looked at compensation at several other companies. Among these were Coca-Cola, PepsiCo and McDonald’s.
Willard made $11,573,699 in 2018. Chief Financial Officer William F. Gifford Jr. made $7,601,685.
Arguably, they are doing better than shareholders.