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Altria: Attractive Dividend Payer, But Declining Business

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In my past article astir Altria Group Inc. (NYSE:MO), which was published astatine nan opening of September 2022, I wrote that investors should guidelines for a steep recession. At nan clip of publication, nan banal was trading for $45 and now it is almost trading for nan aforesaid price. Nevertheless, owed to nan precocious dividend payments, investors would person generated astir 8% return and intelligibly outperformed nan S&P 500 (SPY), which returned astir 2% successful nan aforesaid timeframe.

SA Contributors are mostly bullish astir Altria

SA Author's standing for Altria (Seeking Alpha)

And contempt a fewer "Sell" and "Hold" ratings successful nan past 30 days, nan sentiment among Seeking Alpha contributors tin beryllium described arsenic mostly bullish. Although I spot Altria not arsenic nan champion finance retired there, it remains absorbing for its precocious dividend output and erstwhile pressed, I would besides beryllium somewhat bullish.

In nan pursuing article, we will look astatine nan yearly results Altria reported astatine nan opening of February 2023 and look astatine nan dividend, stock buybacks arsenic good arsenic nan equilibrium sheet. Additionally, I will connection an intrinsic worth calculation and look astatine nan risks associated pinch an finance successful Altria.

Results

While Altria beat non-GAAP net per stock somewhat by $0.02, gross missed by $70 cardinal successful nan 4th quarter. In fiscal 2022, nan institution generated $25,096 cardinal successful gross and compared to $26,013 cardinal 1 twelvemonth earlier this is resulting successful a 3.5% year-over-year decline. However, operating income accrued somewhat 3.1% year-over-year from $11,560 cardinal successful fiscal 2021 to $11,919 cardinal successful fiscal 2022. And finally, diluted net per stock much than doubled from $1.34 successful fiscal 2021 to $3.19 successful fiscal 2022.

When looking astatine adjusted diluted net per share, we saw an summation from $4.61 successful fiscal 2021 to $4.84 successful fiscal 2022 - resulting successful an summation of 5.0% year-over-year. And free rate travel declined 2.2% YoY from $8,236 cardinal successful fiscal 2021 to $8,051 cardinal successful fiscal 2022.

 Optimistic outlook for fiscal 2023

Altria Q4/22 Presentation

And finally, Altria is expecting adjusted diluted net per stock to beryllium successful a scope of $4.98 to $5.13 successful fiscal 2023 (compared to $5.00 analysts' consensus). Capital expenditures are expected to beryllium successful a scope of $175 cardinal to $225 million.

Dividend and Share Buybacks

I already mentioned supra that Altria remains absorbing for dividend investors owed to nan precocious dividend yield. Right now, Altria is reporting a quarterly dividend of $0.94 resulting successful an yearly dividend of $3.76 and a dividend output of 8.1%. And not only did Altria summation nan dividend for 53 years successful a row, nan dividend maturation complaint successful nan past 5 years was a coagulated annualized 7.7%.

A problem remaining is nan alternatively precocious payout ratio. When utilizing reported net per stock of $3.19, Altria paid retired much successful dividends than it earned (to beryllium precise: nan payout ratio was 115% successful 2022) and this is surely not sustainable. When comparing yearly dividend payments of $3.68 to adjusted net per stock of $4.84 we get a payout ratio of 76% which is still a alternatively precocious payout ratio but acceptable. To get a complete picture, we tin besides comparison nan amounts paid successful dividends ($6,559 cardinal successful fiscal 2022) to nan generated free rate travel ($8,051 cardinal successful fiscal 2022) - this leads to a payout ratio of 81%.

Altria returned rate to shareholders via dividends and stock buybacks

Altria Q4/22 Presentation

The institution is besides utilizing stock buybacks and is reducing nan number of outstanding shares since nan 1980s (it mightiness person repurchased shares before, but I don't person information going backmost further and considering that stock buybacks were only becoming celebrated successful nan 1980s, I uncertainty it). And since nan mid-1980s, nan number of outstanding shares was reduced from astir 3.0 cardinal outstanding shares to 1.8 cardinal shares.

ChartData by YCharts

And Altria will proceed to repurchase shares arsenic nan institution precocious approved different $1 cardinal stock repurchase program, which is expected to beryllium completed by December 31, 2023. However, pinch a existent marketplace capitalization of $83 billion, nan institution tin repurchase only astir 1.2%.

Balance Sheet

But speech from a $1 cardinal stock buyback program, Altria will besides discontinue $1.3 cardinal of notes pinch disposable rate successful fiscal 2023. And though nan indebtedness levels connected nan equilibrium expanse are not problematic, it could make consciousness for Altria to attraction connected repaying debt. On December 31, 2022, nan institution had $1,556 cardinal successful short word indebtedness and $25,124 cardinal successful semipermanent debt. Compared to nan erstwhile year, full indebtedness declined from $28,044 cardinal to $26,680 cardinal and erstwhile comparing nan full indebtedness to nan operating income of $11,919 cardinal it would return only astir 2.25 years to repay nan outstanding debt. And we should besides not disregard that Altria has $4,030 cardinal successful rate and rate equivalents connected its equilibrium expanse - capable to repay astir 15% of nan outstanding debt.

Nevertheless, nan equilibrium expanse is acold from perfect. When looking astatine nan plus side, full assets declined from $39,523 cardinal 1 twelvemonth earlier to $36,954 cardinal correct now. The main logic for nan diminution is Altria's investments successful equity securities, which declined from $13,481 cardinal to $9,600 million. But different problem is $17,561 cardinal successful goodwill - meaning that almost half of nan company's assets are goodwill. And mixed pinch Altria reporting a shareholder's deficit, which moreover accrued from $1,606 cardinal to $3,973 million, nan equilibrium expanse is surely not perfect.

Intrinsic Value Calculation

While we should not disregard nan risks Altria is facing (we will get to this again), we should besides not disregard really inexpensive nan banal is. Especially erstwhile looking astatine nan price-free-cash-flow ratio, Altria is presently trading for a valuation aggregate of 10.4 and should lead america to nan conclusion that Altria is cheap. The existent P/FCF is not only beneath nan mean P/FCF ratio of nan past 10 years (17.87) but is besides 1 of nan lowest P/FCF ratio successful nan past 10 years.

ChartData by YCharts

When looking astatine nan price-earnings ratio, nan image is simply a small different, but a P/E ratio of 14.5 still can't beryllium described arsenic expensive. Aside from nan elemental valuation metrics, we tin besides usage a discount rate travel calculation to find an intrinsic worth for Altria. As basal assumptions we are erstwhile again assuming a 10% discount complaint and return nan free rate travel of nan past 4 quarters ($8,051 million). Additionally, we are calculating pinch 1,790 cardinal outstanding shares.

3-year CAGR

5-year CAGR

10-year CAGR

Revenue

1.48%

1.20%

1.69%

Operating Income

4.37%

4.45%

5.00%

Earnings per share

NM

-9.69%

4.47%

When looking astatine nan reported maturation rates successful nan past 10 years, I would reason nan astir optimistic presumption should beryllium 5% maturation from now till perpetuity, which would lead to an intrinsic worth of $89.96 for Altria - doubly nan existent stock price.

Instead, let's beryllium much cautious and presume Altria is not capable to turn again and tin only support nan existent free rate travel stable. This would lead to an intrinsic worth of $44.98 for Altria and make nan banal reasonably weighted correct now.

While it is bully to cognize that Altria is moreover reasonably weighted (assuming a 10% discount rate) erstwhile nan business can't turn again, we did not really return into relationship nan anticipation of a declining business - and Altria is surely facing immoderate challenges raising nan mobility if Altria is simply a risky stake nevertheless.

Risky Bet?

We tin look astatine nan maturation rates of nan past fewer years and for mature business it is surely a coagulated presumption to cipher pinch akin maturation rates successful nan years to come. But Altria is presenting itself successful a very mixed way.

On nan 1 hand, Altria is simply a very capital-light business and must walk only a fraction of its generated rate arsenic superior expenditures. This is bully for shareholders and making Altria a rate cow. On nan different hand, location is nan consequence of Altria investing not capable - and particularly arsenic Altria's halfway merchandise is nether changeless onslaught and request is declining, Altria should beryllium much innovative.

And present we are already looking astatine 1 of Altria's halfway problems. As I person already mentioned successful my erstwhile articles, nan number of smoking adults - particularly successful highly-developed countries - is declining. This is besides visible erstwhile looking astatine nan numbers Altria is reporting. For its smokeable products segment, nan shipment volumes declined from 95,596 cardinal cigarettes (or different smokeable products) successful fiscal 2021 to 86,409 cardinal successful fiscal 2022 - a diminution of 9.6% year-over-year. And this is simply a long-lasting trend. Five years ago, in fiscal 2017, Altria shipped 118,148 cardinal smokeable products. This is surely a problem erstwhile request for nan halfway merchandise is perpetually declining.

So far, Altria has been capable to offset nan diminution by perpetually expanding prices. Revenue per 1000 units accrued from $189.46 successful fiscal 2021 to $210.48 successful fiscal 2022 - an summation of 11.1% year-over-year. And while nan declining request is simply a long-lasting trend, nan changeless value increases are besides ongoing for respective years. In Q4/17, nan Marlboro nett battalion value was $6.72 and complete nan adjacent 5 years it accrued to $8.46 successful Q4/22 - a CAGR of 4.7%.

And this is demonstrating nan wide economical moat Altria has and which is resulting successful utmost pricing power. The economical moat is besides visible successful Altria's improving gross and operating separator complete nan past 10 years.

Altria sees increasing gross separator and operating separator and awesome return connected invested capital

Altria Metrics (Author's work)

And not only are margins improving perpetually for Altria during nan past 10 years, nan institution besides reported an mean return connected invested superior of 27.25% during nan past 10 years, which is very impressive.

ChartData by YCharts

And additionally, Altria' s banal outperformed nan S&P 500 successful an awesome measurement successful nan past fewer decades, which is different hint for a high-quality business. And successful my past article I besides pointed retired that Altria mightiness beryllium recession-resilient, a bully value to person successful nan coming months and quarters.

When summing up, Altria is presenting a mixed picture. And while we are dealing pinch a high-quality business pinch a wide economical moat, we person to beryllium observant not to put successful a perpetually declining business - and astatine immoderate point, value increases mightiness not beryllium enough.

Conclusion

Altria tin still beryllium seen arsenic reasonably weighted (or possibly moreover undervalued) erstwhile assuming that nan institution is capable to execute successful a akin measurement arsenic it performed successful nan past decade. And we should not disregard that Altria has a wide economical moat astir its business starring to utmost pricing powerfulness for nan company.

But Altria besides must usage its pricing powerfulness and summation nan value for its products each twelvemonth successful bid to offset nan declining number of products sold arsenic nan institution is operating successful a assemblage that seems to beryllium successful a long-lasting diminution and not capable to escape.

And that is nan challenging mobility for investors: Are we consenting to put successful a business pinch a wide moat and utmost pricing powerfulness and awesome capacity successful nan past decade, but which is operating successful a assemblage seeing declining demand?

This article was written by

Daniel Schönberger floor plan picture

Part-time investor and contributor for Seeking Alpha since 2016. My study is focused connected high-quality companies, that tin outperform nan marketplace complete nan long-run owed to a competitory advantage (economic moat) and precocious levels of defensibility. Focused connected European and North American companies, but without constraints regarding marketplace capitalization (from ample headdress to mini headdress companies). My world inheritance is successful sociology and I clasp a Master’s Degree successful Sociology (with main accent connected organizational and economical sociology) and a Bachelor’s Degree successful Sociology and History.I besides constitute astir investing, system and akin topics connected Medium: https://medium.com/@danielschonberger

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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