Altria Group (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally.
This dividend stock champion has managed to increase dividends to shareholders for 44 years in a row.
Many databases show reductions in dividend payments in 2007 and 2008, which is due to the spin-offs of Kraft Foods (KRFT) and Philip Morris International (PM). As a result, Altria was kicked out of what I used to believe was the elite dividend aristocrat index. The investors in Altria from early 2007 would have received shares in Kraft and Philip Morris International, and therefore their total dividend income would not have suffered at all.
It actually increased, because all three companies raised dividends in 2008. Those original Kraft shares were further split into Mondelez International (MDLZ) and Kraft. This is why one should not focus on purely quantitative characteristics, but also take the time to understand companies by analyzing them in detail one at a time. By focusing too much on screening, you might miss out on important information.
Since the spin-off of Philip Morris International in 2008, quarterly dividends per share have increased from 29 cents per share to 48 cents per share in 2013.
Altria Group pays a very high portion of net income as dividends to shareholders. However, it has limited needs to reinvest large portions of its net income, which is why this ratio is not as troubling as it would be for Coca-Cola (KO) for example.
In the old days, Altria used its strong cash flows to diversify into food and spirits, but I do not think this is the case nowadays. Back until the early 2000s, Altria was known as Philip Morris. Now, it has a 26.90% economic and voting interest in SABMiller. Altria earned $402 million in dividends from its stake in SABMiller in 2012. It’s share of SABMiller’s profits was $1.224 billion. This stake is worth approximately 20 – 21 billion dollars at current prices. In comparison, Altria’s market capitalization today is $73 billion.
Earnings per share increased from $1.48 in 2008 to $2.26 by 2013. The company expects to earn $2.57 per share by 2014 and $2.76 per share by 2015. While I take forward analyst estimates with a grain of salt, I have a high degree of confidence that Altria can achieve decent earnings growth in the long-run, fueled by price increases which are higher than declines in volume and cost restructurings. This could translate into quarterly dividends hitting $2.05 per share in 2014 and $2.20 in 2015.
The future for tobacco consumption in the US is bleak. I would estimate that amount of cigarettes sold will decline by 3% – 4%/year for the foreseeable future. There are bans on smoking in public, buildings, parks, bars etc.
However, there is a difference between the future for tobacco consumption, and the future for tobacco companies. The reason behind this variance is stemming from the fact that demand for cigarette products is relatively inelastic. This means that an increase in the price of cigarettes typically results in declines in the amount of cigarette consumption. The increase in prices however is usually higher than the declines in consumption, which results in higher revenues overall.
The market for tobacco companies is inefficient, because there are some investors who are biased against tobacco companies, regardless of valuation or future business prospects. This does not mean these investors are morally right or wrong – they have the right to their own opinions. However, they are not being rational in evaluating tobacco companies as investments.