Many people know Altria Group (NYSE:MO) as the tobacco conglomerate that owns the famous Marlboro brand. But many don't know that the company also owns a 10% stake in Anheuser Busch (NYSE: BUD), the alcohol conglomerate that owns Budweiser, Busch, and other beer brands. This stake is currently worth north of $13 billion and plays a big part in calculating the intrinsic value of Altria.

While it can pay to diversify, Altria management should seriously consider selling its stake in Anheuser Busch. Here's why.

Pack of cigarettes' with one poking out.

Image source: Getty Images.

Why the two companies teamed up

Altria's stake in Anheuser Busch originated when SAB Miller closed its merger with the original Anheuser Busch back in October of 2016. Altria was a large shareholder in SAB Miller, and as a part of the merger exchanged SAB Miller shares for Anheuser Busch shares, which it still holds today. The 197.4 million shares it owns are worth around $13.5 billion, or 10.2% of Anheuser Busch. It should also be noted that most of Altria's stake is in restricted shares, which have a five-year lock up from the merger and cannot be sold until October of this year.

The main benefit Altria gets for owning shares, outside of having a 10% stake in a business that generates around $9 billion in free cash flow a year, is Anheuser Busch's high dividend yield. It doesn't scratch Altria's own 8%+ yield, but at 4.66% it is a meaningful part of Altria's various income streams. Anheuser Busch did halt its dividend in 2020 due to the COVID-19 pandemic, but that should resume in 2021 once the economy reopens fully.

Why Altria should sell its shares

When the time comes less than a year from now, Altria's management should seriously consider selling its stake in Anheuser Busch. For one, Anheuser has a huge net debt position (total debt minus cash and equivalents) of $87.4 billion, as of last quarter. This will limit the company's ability to return cash to shareholders over the long term. It also trades at 13.7 times its 2019 earnings, which isn't expensive on its face, but once you consider the massive debt load and the fact that beer sale volumes declined in 2019, it is hard to find any reason to be optimistic about the stock over the next few years.

If Altria decides to sell its Anheuser Busch shares, it would add, at current market prices, over $13 billion of cash to its balance sheet. Since the tobacco business is very mature and doesn't need much capital to continue operations, Altria would likely use this cash to either buyback shares, pay down debt, or a little bit of both. However, with only $25 billion in net debt, a consistent set of businesses that generate $7 billion to $9 billion in cash a year, and interest rates at record low levels, the company does not need to rush to pay back any loans. The best move might be to take the majority of its sale proceeds and consistently repurchase its own shares over the next five to 10 years. Repurchasing shares (another word for buybacks) at high levels would reduce the number of shares outstanding, increasing the earnings per share (EPS), assuming net income stays flat or grows over that time period.

Worth around $13.5 billion, Altria's stake in Anheuser Busch accounts for over 17% of the company's current $76.6 billion market cap. If Altria sells its shares, it could return capital to shareholders in the form of share buybacks, which likely would provide better returns than holding onto a stake in a low-growth business.

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