Marlboro cigarette maker Altria (MO 1.14%) has been a fascinating company to follow over the past decade. If you look at its share price, the stock hasn't been a home run, but it's survived a multibillion-dollar mistake in Juul while still growing profits yearly.
In a way, it's a case study of how resilient the tobacco business continues to be, even after decades of fewer and fewer people smoking. While investing in tobacco companies is a personal decision, there is a non-tobacco aspect to Altria that doesn't seem to get much discussion these days.
Here is the non-tobacco reason Altria could make investors a lot of money over the coming years.
A multibillion-dollar stake worth celebrating
When you drink a bottle of Bud Light, Stella Artois, Michelob Ultra, or any of its sibling brands, 10% of the profits from your beer-buying go to Altria. That's because the tobacco giant owns 10% of the world's largest beer company, Anheuser-Busch InBev (BUD 1.28%). A quick look at its $114 billion market cap means that Altria's share is worth about $11.4 billion.
Altria originally owned a significant stake in SABMiller, which merged with Anheuser-Busch in 2016. The deal came with a five-year lockup that prevented Altria from selling its stake until late 2021. But even though Altria is free to sell its shares now, it is holding on tightly instead.
It hasn't been smooth sailing for either Altria or Anheuser-Busch since the merger. The brewer has had to grapple with a mountain of debt, and the pandemic only set it back further as restaurants and bars shuttered.
Why might Altria still hold shares?
Some investors might have rooted for Altria to cash in its chips, take its billions of dollars, and repurchase shares or pay investors a nice dividend. But companies invest just like people do, and you don't give up a quality asset easily. Anheuser-Busch is the world's largest producer of a product that civilization has consumed for ages.
The business is highly profitable, turning $0.14 of every revenue dollar into free cash flow. That's despite a balance sheet saddled with more than $2.8 billion in interest expenses over the past year. Anheuser-Busch's robust cash flow should only become more evident as it pays down debt (since interest expense diminishes cash flow).
BUD free cash flow (% of annual revenue) data by YCharts. TTM = trailing 12 months.
The beer business doesn't appear washed up, either. Analysts believe Anheuser-Busch will grow earnings per share by nearly 11% annually over the next three to five years.
How can that make you money?
With the brewer's forward price-to-earnings (P/E) ratio of 17, investors could capture a lot of that growth as investment returns because the stock trades somewhat on par with the broader market, which commands a P/E of 19 today. In other words, increasing Anheuser-Busch's value by anywhere around 10% every year adds about $1 billion to the value of Altria's stake.
Altria's operating profits were nearly $12 billion in 2022, so that's like adding an annual 8% boost to its profits without lifting a finger. Why disrupt that? As the company trades to increasingly lower valuations, which is currently a forward P/E of 9, its Anheuser-Busch stake arguably becomes harder to ignore.
Warren Buffett has made shareholders a fortune by investing in (and holding) high-quality businesses that steadily generate value over time. Altria's stake in Anheuser-Busch is a similar investment but doesn't get nearly the recognition. Shareholders should hope that Altria continues holding and reaping the rewards of owning this fantastic business over the long term.
