Over the past decade plus MO:NYSE Altria has returned 410% of my original investment in large part to dividend reinvestment. The annual dividend yield is still impressive at 3.33%.
Things in the smoking world are changing so I will be selling a number of shares to equal my original investment while keeping the rest. MO is in a retirement account so this stock has been accumulating tax free.
The plan is to keep most of the shares despite analysts predicting the cigarette industry volumes will be down in the low- to mid-single digits in 2017 due to declining number of smokers and diminished demand from increased state excise taxes, partially offset by increased demand from an improving domestic economy.
In the smokeless tobacco segment, analysts are forecasting volume growth at a low-single digit rate.
MO’s revenue growth is expected to drop to 2.4% in 2017 from 2.6% in 2016.
MO’s margins could improve on higher pricing, restructuring actions and facility consolidation.
MO is focused on productivity improvements and improved cost management after reducing cigarette-related infrastructure during the past few years.
Following a decline in shares outstanding that reflect an active share repurchase program, the estimate for 2017 EPS is $3.29, up 8.6% from operating EPS of $3.03 in 2016.
Plus, the board approved a $3 billion share repurchase program in October 2016, which MO plans to complete by mid- 2018.
Altria is likely to benefit from growth in higher-margin smokeless tobacco products and various restructuring actions.
Altria is the largest player in the U.S. tobacco market, with over 50% share. The company’s addictive products and powerful brands enjoy robust pricing power.
Marlboro has been the dominant cigarette brand in the U.S. for three decades and currently has a 44% share. As marketing restrictions become tighter over time, it may become difficult for competitors to erode Marlboro’s brand power.
The firm’s relatively low capital requirements allow it to return significant capital to shareholders in the form of an 80% dividend payout ratio.
Altria does not have any international exposure, and the U.S. cigarette industry is in long-term decline because of health concerns and strict marketing restrictions.
We expect U.S. consumption to fall 3%-4% annually.
Restrictions imposed by the FDA could hamper manufacturers’ efforts to diversify their product lines, and municipalities may continue to restrict smoking in public places.
Altria has been slower to roll out its innovative products domestically and is behind Reynolds’ Vuse in market share.