Altria Group (NYSE:MO) has a track record of standing up to difficult situations, and the stock's strong performance in 2016 is a testament to the tobacco giant's ability to adapt and find success. After the company released its fourth-quarter and full-year results, Altria CEO Marty Barrington and his executive team went over the results with professional stock analysts and explained some of the important themes they see for Altria going forward. Here are five key issues Altria investors need to watch going forward.
1. Altria likes the outlook for Anheuser-Busch InBev going forward
With Altria's support of Anheuser-Busch InBev's landmark business combination with SABMiller, we enhanced the value of our beer investment and our position in the global brewing profit pool.
It took a long time, but Altria finally has the SABMiller merger with Anheuser-Busch InBev (NYSE:BUD) behind it. After initially taking a smaller-than-expected position in Anheuser-Busch InBev, Altria made market purchases of A-B InBev shares to bring its stake in the beer giant above the 10% level. Going forward, Barrington is convinced that the investment will "deliver strong long-term financial returns to our shareholders," and although CFO Billy Gifford noted that A-B InBev won't generate quite as favorable tax treatment on dividends as SABMiller did, the whole team appears confident in seeing a full year of good earnings from the beer-maker.
2. New California tax hikes on tobacco could hurt
We also know that in April, California, a high-volume state, will implement significantly higher excise taxes, and there are already proposals in several states to raise excise taxes further.
Altria has dealt with constant threats of higher taxation in the jurisdictions where it does business, and the late 2016 vote in California to boost cigarette taxes by $2 per pack will be an especially hard blow for Altria. California is the second-largest cigarette market in the U.S., and Altria has a particularly strong market share in the Golden State. The company doesn't expect any big inventory changes surrounding the implementation date, but going forward, the tax boost could create more downward pressure on total sales volumes.
3. Altria is looking seriously at iQOS
What we're going to try to do is to introduce adult smokers to the product, try to explain what it is and its attributes, and give them an opportunity to see if it's for them.
Reduced-risk products have become increasingly important in the global tobacco market, and Altria potentially has exclusive rights to the iQOS heat-not-burn tobacco product for the U.S. market. Barrington noted that internationally, the success of iQOS has depended on the ability of manufacturers to communicate effectively with consumers. That's been more of a problem in Italy than in Japan, because different levels of regulatory restrictions apply to the two countries. To succeed, Altria will have to navigate U.S. laws and regulations concerning what's allowed in consumer communications, and work to maximize knowledge and exposure to iQOS.
4. Altria hopes for corporate tax reform but isn't taking it for granted
To the extent that corporate income tax rates could be reformed, as we've discussed previously, that would be a good thing for American business, and ... it would be a good thing for Altria.
The Trump administration has trumpeted the need for corporate tax reform, and lower tax rates could provide a big boost for American companies in general, and for Altria in particular. Barrington noted that the company has had a program in place to urge a reduction in the tax rate from a public policy standpoint, but the company hasn't built any expectations for lower taxes into its projections for 2017.
5. No comment on the Reynolds American / British American Tobacco deal
No, I think I'm going to steer away from that topic. As we've discussed previously, I think it's just not appropriate for me to be drawn into either anyone else's transactions or speculation about future transactions. I just don't really know how to discuss that intelligently without going there.
Now that British American Tobacco (NYSE:BTI) and Reynolds American (NYSE:RAI) have come to terms for a merger, many investors remain interested in how Altria will respond. Some believe the company should reunite with its own former international division, which it spun off in 2008. Others point to the advantages of keeping industry exposure purely domestic rather than opening the company up to international challenges. For now, Altria doesn't seem to be in any hurry to respond to the proposed deal, so investors will likely get a chance to see how a post-merger BAT competes against Altria going forward.
Altria's performance has been solid, and shareholders want to see that success continue in the future. Altria has the strategic vision it needs to keep producing good results, but the pace of its growth will depend on how effectively it can implement its strategies in the face of ever-changing competitive conditions.