Tobacco company Altria Group (MO 0.63%) holds a 10% stake in global beer giant Anheuser-Busch InBev. The company acquired the stake when SAB Miller and Anheuser-Busch merged in 2016.
Altria has quite a decision to make. AB-InBev as a company was worth as much as $250 billion at its peak in 2017, but it currently has a market value of just under $100 billion.
Should Altria sell its share to unlock almost $10 billion in cash that it can use elsewhere? Or does the company hold onto it, hoping for the stock's value to rise? Let's look at the case for each option, and see if we can determine what makes the most sense.
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The case for selling
Altria has made it clear that the company desires assets to carry the business once cigarette usage declines beyond the point that price increases can't make up for it. Unfortunately, Altria's efforts to diversify its business over the past few years have gone poorly. It spent a whopping $12.8 billion in 2018 to acquire electronic cigarette maker Juul, which was quickly written down to a value of just $1.6 billion after Juul got hit with lawsuits related to its main product.
Management spent another $1.8 billion in 2019 to acquire 45% of Canadian cannabis company Cronos Group, which has also suffered. Today, the entire business has a market cap of $1.1 billion, meaning Altria's hundreds of millions of dollars underwater.
Meanwhile, smokeable products still make up roughly 86% of operating profits, meaning Altria still hasn't meaningfully diversified its business. Altria can't take another big swing with its balance sheet; there is $24 billion in net debt (total debt minus cash) thanks to these lousy acquisitions.
Selling Anheuser-Busch would give the company enough money to wipe out almost half of its debt and provide money to take another swing at the diversification plate.
The case for holding
But acting for the sake of it can be a big mistake, too. Altria doesn't seem desperate at all. The company's dividend payout ratio is a relatively high, but still affordable 78% of cash flow, and operating profits have grown an average of 6% annually for the past decade to support continued dividend increases.
The 6.6% dividend yield is the No. 1 reason most investors hold Altria, so if the dividend is financially secure, there isn't a rush to make a move.
Additionally, the past several years have been hard on AB-InBev. A large debt load has hurt the company since its massive 2016 merger, and COVID-19 shut down bars, restaurants, and sporting venues worldwide, hurting its bottom line.
If AB-InBev can continue paying down debt, an increase in the share price over the next several years would mean more money in Altria's pocket when it does sell out.
And the verdict is
Ultimately, selling the AB-InBev stake soon doesn't seem wise. Altria's operating profits have grown resiliently for decades and aren't showing meaningful signs of falling off yet; operating income has grown more than 6% annually over the past decade and the most recent three years.
AB-InBev stands a solid chance of growing over the coming years, coming back from its financial and pandemic-induced challenges. Even a 20% to 40% increase in shares over the next few years would mean billions more for Altria. It may not be worth missing out by selling too soon if Altria doesn't need to.
