First Look at Altria (MO). Hint: Quit Smoking and Quit MO.

Bonds outstanding: $12.8 billion, this company has a lot of debt and liabilities that I see as a threat to the dividend.


What the company does – Altria comprises Philip Morris USA (PM USA), U.S. Smokeless Tobacco Company, John Middleton, Ste. Michelle Wine Estates, and Philip Morris Capital Corporation (PMCC). It also owns a 27.1% interest in SABMiller, the world’s second-largest brewer. Through its tobacco subsidiaries, Altria holds the leading position in cigarettes and smokeless tobacco in the U.S., and the number-two spot in cigars. PMCC specializes in leveraged and direct finance leases but no longer accepts new investments.

Morningstar’s take – Having divested its nontobacco and international segments over the last four years, Altria now operates primarily in the challenging U.S. tobacco industry. Cigarette volumes are in structural decline; the Food and Drug Administration, having assumed regulatory control, has been quick to assert its authority. The threat of regulation has now overtaken that of litigation as the most significant risk to an investment in tobacco, in our view. In spite of these headwinds, tobacco manufacturing is still a lucrative business, and we think Altria is well-positioned to generate steady medium-term earnings growth. The addictive nature of cigarettes and Altria’s dominance of the U.S. market are the reasons behind our wide economic moat rating.

DIVIDEND RECORD – Long term dividend payer and grower, but MO cut its quarterly dividend from $0.86 to $0.69 in 2007.  Another big dividend cut occurred in 2008 from $0.75 to $0.29 per share.  The current dividend has grown up to $0.41.  However, the dividend is not safe from cuts in the near future.

Dividend: $0.41 quarterly

Dividend yield: 5.5% ($1.64 annual dividend / $29.67 share price)

Dividend payout ratio: 100% using full year 2011 EPS of $1.64 OR 70.6% using the average earning power over the past six years ($1.64 annual dividend / $2.32 earning power)


EARNING POWER – $2.32 @ 2.05 billion shares

(Earnings adjusted for changes in capitalization)


Net income


Adjusted EPS



$9,786 M

2,116 M




$4,930 M

2,084 M




$3,206 M

2,071 M




$3,905 M

2,079 M




$3,390 M

2,064 M




$3,390 M

2,050 M



Net income


Adjusted EPS

2011 Q1


$937 M

2,084 M


2011 Q2


$444 M

2,076 M


2011 Q3


$1,173 M

2,054 M


2011 Q4


$836 M

2,043 M


2011 total


$3,390 M

2,050 M


Six year average adjusted earnings per share is $2.32

The company recently reaffirmed its 2012 EPS guidance:  If true, then MO will earn closer to their six year average adjusted earning power in 2012.

Consider contrarian buying below $18.56 (8 times average adjusted EPS)

Consider value buying below $27.84 (12 times average adjusted EPS)

Altria is currently trading at 12.8 times average adjusted EPS.  This is stock is priced for investment; it is nearly a value stock.

Consider speculative selling above $46.40 (20 times average adjusted EPS)

BALANCE SHEET – Altria has a horrible balance sheet filled with liabilities, goodwill assets, and intangible assets.  You can see the selloff of much of its assets in 2007-2008.  Shareholder equity has be eroded.  This is not good.


Book value per share: $1.80 ($3,680 M in equity / 2,050 M shares)

Price to book value ratio: 16.5 (under 1.0 is good)  This is absolutely horrible.  You would be paying sixteen times the company’s equity for a share!!

Current ratio: 0.94 (over 2.0 is good)

Quick ratio:  0.46 (over 1.0 is good)

Debt to equity ratio: 2.96 (lower is better)

Percentage of total assets in plant, property, and equipment: 6% (most assets are Intangibles: 46.7% and Other: 27.98% [mostly Goodwill])  I don’t like this at all.

CONCLUSION – Altria is not a dedicated dividend grower.  It has a recent history of cutting its dividend and that bothers me.  Its earnings are fairly stable since the sale of major assets in 2007-2008, but lawsuits and the government are a constant threat to its earnings.  The stock is priced for investment only if you only look at its earnings.  The balance sheet is horrible.  This company only has a book value of $1.80 per share.  Strong company’s build equity; Altria sheds equity.  All measures of the balance sheet are not good.  I would not buy Altria even at its 2009 lows with its current balance sheet.  This stock should not be bought on its fundamentals.


DISCLOSURE – I don’t own Altria (MO).

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Published in: on February 23, 2012 at 2:23 pm  Leave a Comment  

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