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How Altria Group Makes Most of Its Money

By Dan Caplinger - Apr 28, 2017 at 9:06AM

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The answer isn't as cut-and-dried as you'd think.

The tobacco industry is a big moneymaker, and Altria Group (MO 0.02%) has used the power of its Marlboro brand to create an empire in tobacco. It will come as no surprise that because of the size of its cigarette business, Altria makes most of its money from its smokeable tobacco segment. Yet what shocks many investors is that some of Altria's other businesses are more profitable in terms of margin than cigarettes. As you'll see below, it's worth it to know about all of Altria's moneymaking opportunities to have a complete picture of the company's profit potential.

How Altria lights up its income

Altria's smokeable products segment is by far the largest part of the overall company. In 2016, the segment bought in $22.9 billion in net revenue, which accounted for almost eight-ninths of its total sales. The segment's share of operating company income was almost equally impressive, posting $7.77 billion on a reported basis out of Altria's overall $9.01 billion in income.

Tobacco field.

Image source: Altria.

Cigarettes make up the bulk of Altria's smokeable products business. The company sold nearly 123 billion cigarettes in 2016, of which more than 105 billion were Marlboro-branded cigarettes. By contrast, the company's cigar business only had sales of 1.4 billion cigars, dominated by the Black & Mild brand. Marlboro's market share was 44% for the full year, representing the lion's share of Altria's overall 51.4% share of the retail cigarette market.

Yet trends in the smokeable products segment haven't been as favorable as investors would like. Cigarette volume fell 2.5% in 2016 from year-earlier figures, and even price increases were only sufficient to boost net revenue by 0.3%. However, margin figures improved, and savings from lower litigation and benefits costs also helped contribute to faster bottom-line growth.

Why you can't ignore the rest of Altria

Altria's other segments aren't nearly as large as its smokeable products business, and so in terms of raw dollars, they can't compete with cigarettes and cigars. But the growth picture in Altria's other businesses has looked more attractive recently, pointing to opportunities there.

For instance, in the smokeless tobacco segment, 2016 revenue grew at a nearly 10% pace, coming in at $2.05 billion. Reported operating company income of $1.18 billion was 6% higher than 2015's numbers, suggesting faster growth there as well. Shipment volume was up 5% for the year, driven by double-digit percentage gains for the key Copenhagen smokeless tobacco brand. Most importantly, margins for the smokeless tobacco unit are more than 10 percentage points higher than for cigarettes.

Similarly, the wine segment is small but profitable for Altria. Ste. Michelle Wine Estates had revenue of $746 million in 2016, up 8% from 2015, and reported operating company income of $164 million was also 8% higher than the previous year. Being more competitive, the wine unit's margins trail both of Altria's tobacco businesses, but it still provides key diversification for the company.

Raise a glass to profits

Finally, Altria's stake in Anheuser-Busch InBev (BUD 0.02%) will bring in income as well. During 2016, Altria claimed $795 million in earnings from its equity investment in SABMiller, which Anheuser-Busch acquired late in the year. Going forward, similar profit treatment from A-B InBev will provide a boost to overall financial performance. However, it's still unlikely to come close to approaching what cigarettes bring in for the company.

Altria makes most of its money on cigarettes, and that's unlikely to change in the near future. As industry conditions change, however, it's possible that new alternatives to traditional cigarettes will gain traction. If that happens, it could eventually bring to an end the dominance of smokeable products for Altria's bottom line.

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