Marlboro maker Altria Group (NYSE:MO) is well-known for its tobacco business, which spans not just cigarettes but also cigars and smokeless tobacco products. In addition, Altria has the Ste. Michelle wine business under its corporate umbrella, and although it's a tiny part of the overall business, its growth has outperformed the much larger tobacco segment. Yet what has gotten the most attention with Altria this year has been the company's roughly 27% stake in beer maker SABMiller, which intends to move forward with a planned acquisition by Anheuser-Busch InBev (NYSE:BUD). Although investors are largely focusing on the aspects of the proposed merger, largely lost in the shuffle has been the fact that the SABMiller stake's positive impact on Altria's overall earnings has declined in recent years. In that respect, SABMiller has effectively been the worst-performing "segment" of Altria's business.
What's happening to Altria's beer exposure?
Historically, SABMiller has made a substantial contribution to Altria's overall profitability. From 2012 to 2014, SABMiller brought in $1 billion or more in income each year, and the beer business represented almost a fifth of Altria's total pre-tax earnings in 2012.
Yet those figures diminished in 2015, and SABMiller's 2016 performance has been weaker still. During the first quarter, SABMiller contributed just $66 million toward Altria's pre-tax earnings, down by half from the previous year's first quarter and almost three-quarters less than what SABMiller produced in the first quarter of 2016. The beer business bounced back in the second quarter, producing $199 million toward Altria's bottom line. But even that was down from $225 million in 2015's second quarter, producing downward pressure that offset some of the strength in Altria's other segments.
Why has SABMiller given Altria less?
Looking at SABMiller's fundamental business, the first thing that stands out is that the company has seen deteriorating performance over the past year. For the fiscal year ending on March 31, SABMiller reported revenue of $19.8 billion, down more than 10% from fiscal 2015 figures. Even reductions in costs weren't sufficient to overcome the downward impact on earnings, which fell an even steeper 18% to $2.7 billion.
SABMiller blamed much of its negative financial performance on the strength of the U.S. dollar compared to foreign currencies. The company boasted organic volume growth of 5%, and net producer revenues rose 8% on a constant currency basis. In particular, double-digit percentage growth in premium lager and global lager brands supported the company's fundamental success, and improving conditions in Latin America, Australia, and Europe helped to bolster SABMiller's financials even in the face of currency pressure.
Also, SABMiller took one-time charges related to impaired investments on its books. The charges arose from its business in Angola and South Sudan, and SABMiller has had to pull out of South Sudan because of a lack of available foreign currency within that nation. The impairments totaled more than half a billion dollars, with a one-time gain only partially offsetting the impact on SABMiller's bottom line.
What's next for Altria and SABMiller?
If all goes well and SABMiller's merger with Anheuser-Busch InBev goes through, then Altria will emerge with a stake of more than 10% in the beverage giant plus about $2.5 billion in cash. That will give the tobacco giant money it can use to repurchase shares or boost dividends, and it will also sustain its diversification from the beer and soft-drink industry through its continuing stake in Anheuser-Busch InBev.
For now, Altria has taken a hit from its SABMiller interest, but in the long run, the company expects that beer and soft drinks will keep boosting its bottom line over time. If Anheuser-Busch's dreams for SABMiller come true, then Altria should be one of the biggest beneficiaries of the merger for years to come.