Altria: Why I Have Stopped Reinvesting In This Dividend King (Rating Downgrade)
Contributor since 2018 / 5291 Followers
Summary:
- Altria has delivered relatively strong financial results in Q2, 2024, confirming the notion of a gradually growing business.
- Yet, considering these data points and the fact that the stock has delivered almost 30% in total returns since the issuance of my initial investment case, I have become less bullish.
- In this article, I explain the reasons why I have decided to keep my capital in MO, but stopped reinvesting the dividends or increasing the stake here.
krblokhin
Altria Group (NYSE:MO) has been one of my best performing 2024 investment picks so far this year, with the stock (including dividends) being up by almost 30%. Earlier in June, I issued a follow-up article explaining the key reasons behind my decision to further increase the exposure to MO. After the publication of this article, the total returns have landed at ~ 12%, outperforming the S&P 500 by about 10%.
Just recently, Altria circulated its Q2, 2024 earnings deck, where initially the market punished the stock by sending it lower by ~ 5%. Yet, now all of the losses have been regained, and the stock trades almost exactly at the same level where it was right before the Q2 report was published.
All in all, after the recent earnings release and dissecting the key data points, I have decided to stop directing additional capital towards increasing my position in Altria, which includes also shifting MO’s dividends to other income generating allocations in the portfolio. However, I am not divesting any shares here, but just letting the position to gradually become less pronounced in the portfolio.
Here is why.
Synthesis of Q2, 2024 earnings
In a nutshell, the core financial metrics as well as the overall return prospects for Altria improved during the Q2, 2024 period.
While the adjusted diluted earnings per share was unchanged in Q2, 2024 compared to the level achieved in Q2, 2023, it was exactly in line with the Management’s pre-communicated guidance for this quarter. The assumption here is that the earnings growth will take place during the back half of the year, landing at a range of $5.07 to $5.15, which implies an adjusted diluted EPS increase of 2.5% to 4%, respectively. This dynamic where the growth takes place in H2, 2024 period is consistent with that of British American Tobacco (NYSE:BTI), coinciding with the U.S. sector-wide inventory cycles and two extra shipping days in H2. In MO’s case, an additional specificity stems from the timing of the NJOY acquisition in June 2023 and the lapping of investments MO began to make in Marlboro Black last year. The embedded growth potential of Marlboro Black offering is projected to be significant given its focus on engaging customers, who face notable pressures on their wallets and are inherently more price sensitive.
What is interesting is that during Q2, 2024 the smokable products segment recorded a decreasing adjusted operating income by 2% compared to the second quarter last year. While this is indeed only logical given the structurally shrinking cigarette consumption volumes, a drop by 2% could be deemed as a solid in the context of a 13% decline in the domestic cigarette volumes. Namely, MO has done a remarkable job in shielding the Company’s margins.
Now, if we speak about the other product segments, which are the main drivers for MO’s business in the future (including forces that help offset the negative results from cigarette segment), we will observe rather encouraging dynamics.
For instance, the oral tobacco products segment generated a growth of 1.8% in adjusted OCI compared to Q2, 2023. The all nicotine pouches expanded by 12.3 share points on a year-over-year basis, representing now almost 42% of the category. MO also succeeded in increasing the market share for one of its key products on!, keeping the retail share capture rate positive for already several quarters in a row.
On the NJOY front, MO delivered a couple of positive news items as well. During Q2, 2024 NJOY finally received the first and only marketing granted orders from the FDA for menthol e-vapor products, which was one of the tactical growth pillars of NJOY’s acquisition in 2023. An additional element that should keep the growth moment strong (on top of continued fixture resets) for NJOY is the commercialization of the NJOY ACE 2.0 device, which will come with two exclusive tastes. In terms of the registered results so far, the statistics look solid, where both consumables and device shipment volumes experienced an uptick of 14.7% and 80%, respectively. The retail share for NJOY consumables was 5.5% share points, which implies an increase of 1.3 share points from the previous quarter. A major surprise was more than doubling of NJOY’s device share, which increased from 11.6% in Q1, 2024 to 25.4% in Q2, 2024.
Finally, the MO’s capital structure remains strong as well, with the debt to EBITDA remaining at 2.1x level. It was also positive to hear Sal Mancuso – Executive Vice President & Chief Financial Officer – commentary in the recent earnings call that for MO, maintaining the balance sheet at an investment grade level is a priority:
So first, look, we believe it’s in the best interest of our shareholders to manage a strong balance sheet and investment-grade credit rating is important because from time to time, we do enter the commercial paper market as our cash outflows vary over the course of the year, you pay MSA in April and things like that.
The bottom line
As the key data points above indicate, MO remains a solid business with sufficient financial prospects to accommodate its attractive dividend of ~ 7.7%.
With that being said, I have become less enthusiastic about MO and have decided to stop committing additional capital in this position (including not reinvesting the dividends) because of the following:
- Since my initial publication of the bull case, the position has gone up by circa 30%, while the overall growth prospects have really remained the same (i.e., stable and slightly positive).
- As a result of this, MO’s multiple has expanded to FWD P/E of 10x, which is still enticing but already slightly above the 5-year average level.
- In the meantime, I am very bullish on British American Tobacco, which exhibits a similar growth trajectory as Altria but trades at a FWD P/E of 7.7x. At this time, putting a heavier emphasize on BTI as a tobacco sector player makes more sense to me.
As a result of this, I am assigning a hold rating to Altria.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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