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5 Things Altria Management Wants You to Know

By Dan Caplinger – Oct 31, 2016 at 5:20AM

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After reporting solid results, the tobacco giant looks forward to even better times ahead.

Investors have looked to Altria Group (MO 0.27%) for consistent strong performance for decades, and the company has kept finding ways to deliver despite facing tough challenges. After its most recent release of financial results for the third quarter of 2016, Altria CEO Marty Barrington and his team of executives spoke with analysts to discuss how the quarter went and what's ahead for the company. Below, you'll find five of the most important things that Barrington said.

Image source: Altria Group.

1. On the SABMiller / Anheuser-Busch deal's completion

We're very excited that on October 10, Anheuser-Busch InBev completed its business combination with SABMiller.

Many Altria investors have waited to see exactly how the deal between Anheuser-Busch InBev (BUD 0.51%) and SABMiller would pan out. As it happened, the tobacco company received a slightly smaller ownership stake in Anheuser-Busch than it had expected, taking a 9.6% interest through restricted shares. However, the company received much more cash than it had initially projected, and Barrington noted that of the $5.3 billion in pre-tax cash, Altria decided to boost its stock repurchase program from $1 billion to $3 billion. Altria expects that to be finished by mid-2018. Between that and the anticipated growth that AB InBev should produce operationally, Altria is optimistic about how the beer merger will turn out.

2. On capital allocation

In August, our board raised our dividend per share by 8%, marking the 50th increase in the past 47 years.

Altria has always been smart about its capital allocation, and consistent dividend growth has been one way that the company has rewarded shareholders over time. Yet Altria also noted that its move to trade high-coupon debt for new lower-coupon debt should enhance cash flow at the same time that it extends its overall maturity on its debt portfolio. By being smart about taking advantage of low rates as long as they last, Altria can make the most of its earnings and keep delivering dividend increases over time.

3. On new FDA regulations

We're pleased to report that John Middleton and Nu Mark have taken the necessary steps to comply with the [FDA] regulations, and we believe they are well positioned to move forward with their strategies in the new environment.

In August, the so-called deeming regulations from the U.S. Food and Drug Administration became effective. These regulations extended a similar regulatory framework to cover e-cigarettes, e-vapor products, and other reduced risk products as previously existed for traditional cigarettes.

Altria noted that the entire industry is now subject to this regulation, so it doesn't face a competitive disadvantage. Nevertheless, Altria expressed its concerns about the existing backlog of new product applications covering the area, but Barrington seems confident that staffing levels at the FDA have increased enough to handle the rising workload going forward and allow Altria to move ahead with its overall strategic plans for reduced-risk products.

4. On the wine business

You've seen the numbers. It performs extremely well. They have tremendous brands, and they've been growing their adjusted operating company income strongly over time.

The Ste. Michelle wine business gets relatively little attention at Altria, mostly because it is so small compared to its tobacco-related businesses. Nevertheless, Altria's managers spare no effort to make it clear that it isn't aiming to play a hugely active role in the operations of the wine business. In particular, Barrington said that he doesn't see Ste. Michelle participating in any trend toward major consolidation in the wine industry. Rather, Altria merely provides capital as necessary to help Ste. Michelle make small strategic acquisitions, and the parent company seems quite content with the pace of growth in the wine business.

5. On the potential Reynolds American transaction

We're just not going to comment on that. It's just been announced that there's been an approach, and we make a policy of not commenting on other folks' transactions.

It's natural for analysts to wonder what Altria's response would be to the proposed combination of archrival Reynolds American (RAI) with its international partner British American Tobacco (BTI -0.48%). The deal would combine Reynolds' extensive U.S. business with the global reach that British American currently has, and it would also bring global distribution for some of the two companies' key brands under a single corporate entity.

From a competitive standpoint, however, it's unclear how much Altria would be affected. The greater question is likely whether Altria would take a similar step to once again become a global behemoth in the industry. Having gone the opposite direction less than a decade ago, Altria probably won't be in as much of a rush as British American to make that happen. Nevertheless, it will be something for investors to watch in the near future.

Altria has continued to perform well, and many investors have high expectations for the tobacco giant going forward. With a new war chest of cash, Altria has plenty of options at its disposal in considering how best to foster further growth in the months and years to come.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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