Altria Group Inc (NYSE:MO) doubled down on its sin-stock status after buying a big stake in Anheuser-Busch InBev SA NV (ADR) (NYSE:BUD), but it’s the juiced-up buyback program that makes MO look good in the intermediate-term.
The closing of BUD’s merger with SABMiller plc (OTCMKTS:SBMRF) gave MO a 9.6% stake in the smoking and wine behemoth. The windfall makes MO the single largest shareholder in BUD stock. The company also received more than $5 billion in cash from the completion of the deal.
Much of this should have already been priced into the stock by now. The massive increase in the share repurchase program could be another matter. MO raised its commitment to buy back stock to $3 billion from $1 billion through the second quarter of 2018.
Financial engineering isn’t the preferred way to generate gains, but investors will take it. More importantly, the addition of the BUD stake gives Altria exposure to some much-needed diversification. Although MO is making progress in claiming its share of the e-cigarette market, the larger traditional business is under secular pressure.
BUD has its own problems with the growing popularity of beers from independent producers, but the growth profile is significantly improved thanks to the savings from the merger.
Altria Stock Plus BUD Equals Cash
It’s also no small matter that Anheuser-Busch pays a dividend of $4.60 a share. That’s good for a dividend yield of 3.59% at current levels. Between the cash infusion and share buyback, Altria stock has some enviable financials at its back.
On a more fundamental basis, volume growth has been better than expected. Investments in e-cigarettes, e-commerce and a strategic partnership with Philip Morris International Inc. (NYSE:PM) also serve as long-term tailwinds.
As much as MO is beefing up its credibility as a sin stock, keep in mind that growth isn’t really part of the equation. It’s all about the fat stream of reliable dividends. Ownership of the stake in Anheuser-Busch serves to undergird this name as an income play.
The best thing that can be said about sin stocks is they offer gushers of free cash flow and low volatility. With the added ballast of BUD, Altria stock looks more stable than ever.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
