Is Altria Heading in the Right Direction?
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Shares of Altria Group (NYSE: MO) haven’t perform well during August and September. Nonetheless, the stock has performed well on a yearly scale as it has outperformed the S&P500. The company’s decision to expand its operations to other fronts such as smokeless products and wine raises the question do these products have a substantial impact on the company’s financial results? Are they profitable? Let examine these issues in further detail.
During 2011, besides the familiar cigarette brands the company has been selling such as Marlboro, the company has also been selling: smokeless products, cigars, and wine. Among these products the most profitable product was smokeless products – in 2011 its operational profitability reached 51% compared with “only” 25% operational profitability for cigarettes. Nonetheless, this product represents only 7% of the company’s total revenues in 2011 and only 12% of the company’s operating earnings.
The company also offers wine which only represents 2% of the company’s total revenues and 1% of the company’s operating earnings. Further, the operational profitability was “only” 17.6%. This puts the wine product less attractive than other products Altria is selling, in terms of profit margins.
Finally, cigars are also taking a small part out of the total revenues of the company: in 2011, the cigars segment represents 2% of the company’s total revenues and 3% of the company’s operating earnings. Further, the operational profitability was 28%.
In terms of growth, from 2010 to 2011, there was a decline in revenues for cigarettes, a 1.1% decline, while there was growth in all other above-mentioned products with wine leading the way at 12.4% followed by smokeless products with 4.8%. Despite these rises, the revenues declined by nearly 2.3% (year-over-year; there was also a sharp fall in financial services that pulled down revenues).
This means that the company’s decisions to enter other segments, in particular into smokeless products, have proved to be a good one. Let’s see how the company has performed compares to other companies and the market.
Altria and S&P 500
The mid-strong correlation between Altria stock and the S&P500 (during 2012 the linear correlation between their daily percent changes was 0.29) may have also slightly contributed to the recent rally of Altria. During 2012 (UPD) the company’s stock rose by nearly 23.1% and the S&P500 by 12.6%. The chart below presents the movement of the company’s stock and the S&P500 during recent months (prices are normalized to the beginning of the April). As seen, in recent months Altria has substantially outperformed the S&P500.
Altria and Dividend
The company announced, back in late August, another increase in its dividend by 7.3% which will reach to $0.44 per share to be paid by October 10th. This means the annual dividend is at $1.76 per share, which represents nearly 5.3% yield. In comparison, several other big tobacco companies offer lower yields: Philip Morris International (NYSE: PM) offers a 3.5% yield, and British American Tobacco (NYSEMKT: BTI) offers only 2.6% in yield. But there are also other differences between these two companies and Altria, most notably is that both Philip Morris Int. and British American operate outside of the U.S. This puts these companies in other risks that Altria doesn’t have to face such as currencies risks: During the first half of 2012, currency fluctuations were one of the prime reasons that impeded the rise in BTI's earnings – according to the company’s estimates nearly £90 million (roughly $140 million) were cut from earnings due to currency shifts.
PMI management expects that unfavorable currency changes will result in an approximate $0.27 per share for the entire year of 2012.
The company expanded its operations outside of regular cigarettes and even though some of these consumer products offer higher profit margins than regular cigarettes, they still represent a very small portion of the company’s revenues and earnings.
This analysis shows that in terms of profitability if the company will continue to develop its operations into other segments, particularly smokeless products, this could also help rally the company’s revenues and sustain its growth.
For further Reading: Why Caterpillar isn’t pulling up? Just blame it on the Oil
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