Altria Group Inc (NYSE:MO) announced its 2016 third-quarter and nine-month business results and reaffirmed its outlook for 2016 full-year adjusted diluted EPS.
“Altria delivered excellent performance in the third quarter and for the first nine months.” said Marty Barrington, Altria’s Chairman, Chief Executive Officer and President. “Our core tobacco businesses delivered solid income growth on the strength of their leading premium brands. We also continued to simplify business processes, streamline infrastructure and invest in important growth initiatives. And with the completion of Anheuser-Busch InBev’s business combination with SABMiller, we maximized the value of our SABMiller investment and expanded and extended our share repurchase program. Going forward, we continue to have a position in the global brewing profit pool as a significant shareholder in the new combined company.”
Cash Returns to Shareholders – Dividends and Share Repurchase Program
In August 2016, Altria’s Board of Directors (Board) increased the regular quarterly dividend by 8.0% to $0.61 per share. The current annualized dividend rate is $2.44 per share. As of October 21, 2016, Altria’s annualized dividend yield was 3.83%. Altria paid more than $1.1 billion in dividends in the third quarter and $3.3 billion for the first nine months of 2016. Altria expects to continue to return a large amount of cash to shareholders in the form of dividends by maintaining a dividend payout ratio target of approximately 80% of its adjusted diluted EPS. Future dividend payments remain subject to the discretion of the Board.
During the third quarter, Altria repurchased 2.6 million shares at an average price of $66.23, for a total of $171 million. As of September 30, 2016,Altria had approximately $453 million remaining in the previous $1 billion share repurchase program. On October 11, 2016, following the completion of Anheuser-Busch InBev SA/NV’s business combination with SABMiller plc (SABMiller), Altria’s Board expanded and extended the $1 billion share repurchase program to $3 billion. Altria expects to complete the share repurchase program by the end of the second quarter of 2018. The timing of share repurchases depends upon marketplace conditions and other factors. This program remains subject to the discretion of the Board.
Product Innovation and Regulation
In e-vapor, Nu Mark, LLC (Nu Mark) continued its disciplined distribution of MarkTen XL while preparing for the U.S. Food and Drug Administration’s (FDA) final deeming regulations, which came into effect on August 8, 2016.
In heated tobacco, Altria continues to partner with Philip Morris International Inc. (PMI) on its FDA applications for iQOS. PMI plans to submit a modified risk tobacco product application to the FDA by the end of 2016, and a pre-market tobacco product application in the first quarter of 2017. Altria’s U.S. commercialization and marketing plans for iQOS continue to progress, and Altria is working closely with PMI to capitalize on insights from current iQOS markets.
All the tobacco products that Altria’s operating companies manufacture and market are now regulated by the FDA. Altria and its companies continue to focus on compliance and constructively engaging with FDA and others to advocate for science- and evidence-based decisions that are consistent with the statute, promote innovation, and create sound public policy.
In September 2016, Altria purchased approximately $441 million aggregate principal amount of its senior unsecured 9.95% Notes due in 2038 and approximately $492 million aggregate principal amount of its senior unsecured 10.20% Notes due in 2039 in a debt tender offer. The transaction resulted in a one-time, pre-tax charge against reported earnings in the third quarter of 2016 of $823 million.
Concurrent with the debt tender, Altria issued $2 billion in new debt, comprising $500 million aggregate principal amount of senior unsecured 2.625% Notes due in 2026 and $1.5 billion aggregate principal amount of senior unsecured 3.875% Notes due in 2046.
As a result of these activities, Altria reduced its weighted average coupon rate and extended its weighted average debt maturity.
Pension Plans Contributions
In the third quarter of 2016, Altria made voluntary contributions totaling $500 million to its pension plans.
In January 2016, Altria announced a productivity initiative designed to maintain its operating companies’ leadership and cost competitiveness (Productivity Initiative). Altria continues to expect the Productivity Initiative, which reduces spending on certain selling, general and administrative (SG&A) infrastructure and implements a leaner organizational structure, to deliver approximately $300 million in annualized productivity savings by the end of 2017.
Altria estimates total pre-tax restructuring charges in connection with the Productivity Initiative of approximately $140 million. These charges, substantially all of which will result in cash expenditures, consist of employee separation costs of approximately $120 million and other associated costs of approximately $20 million. During the first nine months of 2016, Altria recorded pre-tax charges of $130 million and expects the remaining charges to be incurred during the balance of 2016.
Altria announced today the consolidation of certain operating companies’ manufacturing facilities to streamline operations and achieve greater efficiencies. John Middleton Co. (Middleton) will transfer its Limerick, PA operations to the Manufacturing Center site in Richmond, VA. U.S. Smokeless Tobacco Company LLC (USSTC) will transfer its Franklin Park, IL operations to its Nashville, TN facility and the Manufacturing Center site in Richmond, VA. Employees affected by the consolidation will be offered the opportunity to transfer into available positions; those who do not do so will be offered separation benefits. The consolidation is expected to be completed by the first quarter of 2018 and deliver approximately $50 million in annualized cost savings by the end of 2018.
As a result of this consolidation, Altria expects to record total pre-tax charges of approximately $150 million, or $0.05 per share. Of this amount,Altria expects to record pre-tax charges of approximately $60 million, or $0.02 per share, in the fourth quarter of 2016, $75 million in 2017 and the remainder in 2018. The estimated charges relate primarily to accelerated depreciation ($55 million), employee separation costs ($45 million) and other exit and implementation costs ($50 million). Approximately $90 million of the total pre-tax charges are expected to result in cash expenditures. These estimated charges do not reflect the non-cash impact that may result from pension settlement and curtailment accounting.
Completion of Anheuser-Busch InBev’s Business Combination with SABMiller
On October 10, 2016, Anheuser-Busch InBev completed its business combination with SABMiller (the Transaction). As previously announced, the combined group will retain the name Anheuser-Busch InBev SA/NV (AB InBev). In connection with the closing, Altria received 185,115,417 restricted shares of AB InBev, representing a 9.6% ownership of AB InBev, and approximately $5.3 billion in pre-tax cash. These results reflect the terms of the partial share alternative (PSA), including proration, and the proceeds from the currency derivatives that Altria entered into to hedge its British pound exposure (Currency Derivatives). Further, Marty Barrington, Altria’s Chairman, CEO and President, and Billy Gifford, Altria’s CFO, have been appointed to AB InBev’s Board of Directors.
As a result of the Transaction, Altria expects to record a total estimated pre-tax gain in its reported earnings of approximately $13.7 billion, or $4.55per share, substantially all of which will be recorded in the fourth quarter of 2016 (the Gain).
Subsequent to the Transaction and through October 24, 2016, Altria purchased approximately 12 million ordinary shares of AB InBev for a total cost of approximately $1.6 billion, thereby increasing Altria’s ownership to approximately 10.2%. For ownership levels at or above 10%, Altria is entitled to foreign tax credits available in connection with dividends Altria receives from AB InBev, as it was with its former SABMiller investment.
Altria will use the equity method of accounting for its investment in AB InBev. As previously disclosed, Altria will report its share of AB InBev’s results using a one-quarter lag because AB InBev’s results will not be available in time to record them in the concurrent period. For example, Altria’s share of AB InBev’s results for the relevant, post-closing portion of the fourth quarter of 2016 will be recorded in Altria’s 2017 first-quarter statement of earnings. Previously, Altria recorded results from its SABMiller investment concurrently with Altria’s reporting calendar.
This timing lag will not affect Altria’s cash flows or quarterly dividends per share, but will impact year-over-year comparability of reported and adjusted diluted EPS in the short-term.
2016 Full-Year Guidance
Altria reaffirms its most recent guidance for 2016 full-year adjusted diluted EPS, which reflects the reporting lag, to be in a range of $2.98 to $3.04. This represents a growth rate of 6.5% to 8.5% from a 2015 adjusted diluted EPS base of $2.80. The guidance excludes the Gain, the gain on the Currency Derivatives incurred from October 1, 2016 through October 14, 2016, charges associated with the facilities consolidation discussed above, and the special items for the first nine months of 2016. (Original Source)
Shares of Altria are currently trading at $65.27, up $0.75 or 1.16%. MO has a 1-year high of $70.15 and a 1-year low of $56.15. The stock’s 50-day moving average is $63.00 and its 200-day moving average is $64.37.
On the ratings front, Altria has been the subject of a number of recent research reports. In a report issued on October 11, Jefferies’ analyst Owen Bennett reiterated a Hold rating on MO, with a price target of $70, which represents a potential upside of 8% from where the stock is currently trading. Separately, on September 15, CLSA’s Michael Lavery maintained a Buy rating on the stock and has a price target of $68.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Owen Bennett and Michael Lavery have a yearly average return of 6.3% and 3.5% respectively. Bennett has a success rate of 67% and is ranked #1549 out of 4188 analysts, while Lavery has a success rate of 58% and is ranked #1743.
Overall, 2 research analysts have assigned a Hold rating and 3 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $73.00 which is 13% above where the stock closed yesterday.