Altria Continues To Destroy Shareholder Value

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Back connected June 12th, 2019, we published an article explaining why we had nary volition of investing successful Altria (NYSE:MO). We pointed retired that contempt slowing net per stock maturation and declining volumes successful its core cigaret business, nan company's moat among committed smokers remained robust, and it was diversifying into ancillary businesses. It besides made for a awesome protect play and sported an investment-grade equilibrium expanse and comparatively debased valuation multiples. However, management's questionable superior allocation and attempts to diversify distant from its halfway cigaret business were concerning.

Since then, our be aware has been validated, pinch nan banal generating meaningful underperformance:

ChartData by YCharts

This underperformance mostly stems from MO's grounded attempts to diversify, arsenic MO's repeated superior allocation blunders person destroyed billions of dollars successful shareholder value. In this article, we will return a look astatine nan latest quarterly results arsenic good arsenic Altria's latest deals and past re-evaluate our original study of nan institution and stock our updated viewpoint.

MO Q4 Results

Altria reported Q4 Non-GAAP EPS of $1.18, beating expert estimates by $0.02, but its gross of $5.08B declined somewhat (-0.2% Y/Y) and missed estimates by $70M.

Management's plans for 2023 see a continuation of their strategy to equilibrium net maturation and shareholder returns pinch strategical investments. The institution expects to present 2023 full-year adjusted diluted EPS successful a scope of $4.98 to $5.13, representing a maturation complaint of 3% to 6% from a guidelines of $4.84 successful 2022. It expects its full-year adjusted effective taxation complaint to beryllium successful a scope of 24.5% to 25.5%, and superior expenditures to beryllium betwixt $175M and $225M.

Additionally, nan institution authorized a caller $1 cardinal stock repurchase program, which it expects to complete by December 31, 2023. Altria besides plans to discontinue astir $1.3B of notes coming owed later this period pinch disposable cash.

MO Recent Deals

MO guidance - successful their never-ending quest to diversify extracurricular of their declining halfway smokeable products business - precocious announced a slew of deals aimed successful that direction.

First and foremost, past Friday it announced that it had yet waived nan achromatic emblem and was exiting its ill-fated liking successful Juul Labs aft losing billions of dollars connected that investment. MO announced that it would speech its full number liking successful Juul Labs for a non-exclusive world licence to immoderate of Juul's heated baccy intelligence spot (agreement).

Then this Monday MO confirmed a $2.75B rate woody to get NJOY Holdings, including $500M successful rate payments contingent connected definite regulatory outcomes pinch NJOY products. Altria CEO Billy Gifford said that they judge they tin responsibly accelerate U.S. big smoker and competitory big vaper take of NJOY ACE successful ways that NJOY could not person achieved arsenic a standalone company. He besides stated that they judge nan strengths of their commercialized resources tin use big baccy consumers and grow competition.

With this acquisition, Altria's enhanced smoke-free portfolio will see complete world ownership of products and technologies crossed nan 3 largest smoke-free categories, arsenic good arsenic a associated task pinch JT Group for nan U.S. commercialization of heated baccy instrumentality products.

MO Stock Outlook

As smoking rates successful nan United States proceed to decline, MO continues to conflict nan declining volumes successful its halfway smokable products business. The number of cigaret smokers successful nan U.S. is decreasing annually, resulting successful less customers for baccy companies for illustration Altria, and declining income volumes successful its smokable business. In nan past, baccy manufacturers person managed to offset mislaid gross pinch value hikes, and we expect them to beryllium capable to proceed doing truthful moving forward.

That said, yet nan volumes will go truthful debased that MO will beryllium incapable to prolong net per stock and its hefty dividend payout pinch its halfway smokable products business. As a result, it has been making monolithic investments into innovative products that are related to its halfway cigaret business. Unfortunately, it has grounded to find a large victor successful these efforts, including nan $13 cardinal positive finance successful e-cigarette leader JUUL that it mislaid virtually each of.

Meanwhile, it has besides invested aggressively successful stock buybacks successful an effort to thrust net per stock maturation without having to put successful outer businesses. However, this effort has proven to beryllium a mediocre usage of superior arsenic nan institution purchased billions of dollars' worthy of shares astatine prices that person resulted successful mediocre returns connected finance for nan company:

ChartData by YCharts

In fact, nan institution executed a peculiarly precocious stock buyback during nan banal price's highest successful 2017.

With specified a mediocre way grounds for allocating capital, nan merits of nan company's latest multi-billion-dollar finance into NJOY Holdings is highly questionable. With nan company's nett full agelong word indebtedness very elevated successful caller years and nan payout ratio remaining northbound of 80%, MO is moving retired of wiggle room to proceed misallocating shareholder capital:

ChartData by YCharts

Moreover, MO banal has generated virtually nary returns complete nan past half decade, moreover erstwhile including nan hefty dividend, getting crushed by nan broader marketplace (SPY) successful nan process:

ChartData by YCharts

Last, but not least, nan stock's valuation is not peculiarly charismatic present either. While surely not overvalued, its 9.33x value to net ratio is astir in-line pinch its three-year mean of 9.65x. Given that liking rates person soared higher complete nan past 3 years, this makes this flimsy discount look for illustration not overmuch of a discount astatine all:

ChartData by YCharts

Investor Takeaway

Given management's mediocre superior allocation way record, nan secular headwinds facing nan company's halfway business, and nan lackluster valuation comparative to liking complaint levels, location is small to compel america to bargain MO astatine nan moment.

Furthermore, we person small logic to spot management's assumptions that its latest multi-billion-dollar acquisition will boost net meaningfully fixed their mediocre way record. In fact, if they neglect here, it will only thrust their leverage higher and push them moreover person to pursuing successful AT&T's (T) footsteps arsenic a grounded precocious output antiquated dividend grower that - aft years of destroying billions of dollars of shareholder worth - has to slash its dividend successful bid to deleverage nan equilibrium sheet.

If MO were simply conservatively managing its declining halfway business for cash, responsibly increasing its dividend, paying down debt, and buying backmost shares hand-over-fist pinch nan leftovers, it mightiness really beryllium an intriguing worth play. However, pinch its repeated misadventures into adjacent business spaces alongside its little than mouthwatering valuation, we are forced to complaint it a Hold and steer clear successful favour of amended precocious yielding opportunities.

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Editor: Naga

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