Altria Group Inc (NYSE:MO) could have had a better quarter, but they also could have had a worse The cigarette maker is successfully “doing more with less,” between the smoking-cessation headwind and impending exit of CEO Marty Barrington. Still, MO stock slipped slightly into the red following Thursday morning’s fourth-quarter report.
The quarter’s numbers, however, mean very little in the grand scheme of things. Altria remains a leader in its respective market, but it’s a market with a dim future. Even if the company takes the smokeless segment by storm — and it arguably has the tools to do so — it’s still a company fighting a battle that’s barely worth winning.
Altria Group Earnings Recap
For the quarter ending in December, Altria Group turned $6.1 billion worth of revenue and net-revenues (net of excise taxes) of $4.7 billion into an operating profit of 91 cents per share. Analysts were only modeling earnings of 80 cents per share of MO stock, but were also looking for post-excise-tax revenue of $4.8 billion.
In the year-earlier quarter, Altria earned 68 cents per share on $6.25 billion, or $4.7 billion after factoring in excise taxes.
The comparative results mean very little, as Altria is a moving target, buying and selling pieces of itself and incurring lots of one-time charges but also creating one-time benefits that shake and stir the books. It’s now part-owner of Anheuser Busch Inbev NV (ADR) (NYSE:BUD). It also holds equity in SABMiller. The former spurred an accounting charge during the quarter in question, while the latter boosted the bottom line.
Altria also took charges related to the extinguishment of nearly $1 billion in debt.
Regardless, CEO Marty Barrington, who will be stepping down later in the year, commented:
“Altria had another strong year in 2017. We delivered outstanding financial performance and continued to focus on rewarding our shareholders — paying out $4.8 billion in dividends, increasing our dividend by 8.2% and repurchasing more than $2.9 billion in shares.”
Still, questions remain.
There’s no denying that the heightened awareness about the dangers of smoking are working against Altria Group. Smokeable product revenue fell 3.2% year-over-year, and was still down 1.0% despite a modest reprieve in excise tax rates. The total number of cigarettes sold during the fourth quarter fell 8.9%, and were lower by a bit more than 5% for the full year.
It’s a headwind that’s also adversely impacting rivals like Philip Morris International Inc. (NYSE:PM) and British American Tobacco PLC (ADR) (NYSE:BTI). So most of the industry is now putting more attention on — and investment in — e-cigarettes.
The crux of Altria’s effort on that front is its NuMark subsidiary, which makes and markets the MarkTen e-cigarette lineup. The potential game-changer, however, is its iQOS heated tobacco device. It’s already on store shelves in other countries, but has struggled a bit with regulators here in the United States. It’s not likely to be approved by the FDA with its initial marketing plan though, as the agency’s advisory board didn’t see that the use of this device is safer than smoking tobacco. A modified label may be required.
Even so, Altria has much catch-up work to do if it wants to compete with e-cig market leader Juul Labs. And even if the iQOS and MarkTen continue to turn heads, e-cigarettes are losing their luster as researchers find more and more danger in using them.
In the meantime, smokeless tobacco products — Copenhagen and Skoal — saw 11% revenue growth on flat shipments. Sales of Altria’s wine products fell more than 8% year-over-year. For better or worse, those two arms only drive about one-eighth of the company’s revenue.
Bottom Line for MO Stock
Most investors are all too aware that the growing disinterest in smoking has made things tough for Altria. Indeed, it’s surprising the cigarette maker has held up as well as it has.
Then again, the company still isn’t going to do as well as most analysts had hoped. Altria guided for a profit of between $3.90 to $4.03 per share this year, falling short of analyst expectations of $4.18 per share of MO stock.
There is one upside here. That is, nobody really expects meaningful growth from Altria in the near future, if ever. It’s all about sustaining its current cash flow to pay the dividend… a dividend yield of 3.8% that’s sustainable barring any unforeseen stumble, even if not apt to grow.
All the same, any newcomer to MO stock has to be wondering what the end-game here is.
Its core business isn’t coming back, and it can’t simply buy its way into other businesses forever, particularly when its other ventures are stakes managed by other people and not a business it operates on its own, for itself. E-cigarettes can’t carry all the weight, and certainly not carry enough weight soon enough. The future is even murkier with Barrington on his way out.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.