Altria (MO +1.32%) hasn't had a lot of good news to report lately, but investors were cheering its latest move on Thursday, which will raise billions in cash.
The Marlboro maker said it would sell a significant percentage of its stake in Anheuser-Busch InBev (BUD 1.83%). News of the sales sent the high-yielding dividend stock up 2.2% on Thursday.
In a filing, Altria said it plans to sell 35 million shares of Anheuser-Busch through a public offering at $61.50 a share, and in addition, it would sell $200 million worth of the stock directly to Anheuser-Busch. In total, Altria expects to receive $2.4 billion from the sale. The underwriters also have the option of purchasing an additional 5.25 million Anheuser-Busch shares from Altria, for which Altria would receive an additional $323 million, not including any fees associated with the transaction.
Altria will still retain a majority of the stake it had previously held in ABI, now worth approximately 8.1%, or roughly $10 billion of the alcohol giant.
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Altria's plan for the new capital
Altria has long been a cash machine and returns most of its profits to investors in the form of a generous dividend. Historically, the company aims for a dividend payout ratio of 80%. Given its focus on returning capital to shareholders, it shouldn't come as a surprise that Altria is returning the new capital to shareholders, this time in the form of buybacks.
The company said it was increasing its existing $1 billion share repurchase program by $2.4 billion. It expects to complete those share repurchases by the end of the year as part of an accelerated share repurchase program.
CEO Billy Gifford said: "We have a long-standing history of returning cash to our shareholders, and today's announcement reflects our continued desire to create long-term shareholder value."
With Altria's market cap currently sitting at around $80 billion, the additional repurchases will have an immediate effect, leading the company to raise its full-year adjusted earnings per share guidance from $5.00 to $5.15 to $5.05 to $5.17. This represents a growth rate of 2% to 4.5% from $4.95 in 2023. It also expects cash savings by reducing the number of shares that it needs to pay dividends on. Finally, the move will reduce its equity earnings from ABI, but it's still a net positive for earnings on a per-share basis.
Is it the right move?
Altria's minority stake in ABI is something of an accident of history. Philip Morris, as the company was known for most of its history, acquired Miller Brewing in 1969 at a time when the tobacco giant was diversifying its business interests. SAB acquired Miller in 2002, but Philip Morris retained a minority stake in the company. When Anheuser-Busch acquired SABMiller in 2016, that stake dwindled again, but the tobacco giant still held on to some.
ABI stock has underperformed the market in recent years, and the share sale makes sense in a number of ways. There's no strategic benefit for Altria in owning ABI. While there's an argument for diversification, at this point, the company might be better off diversifying elsewhere given ABI's performance.
If selling ABI stock allows Altria to increase its own earnings per share by repurchasing stock, and save cash on dividends, that sounds like a compelling argument for moving on from ABI.
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Why it could be a warning sign
However, there could be another motivation for the stock sale. Altria has committed to raising its dividend by mid-single-digit percentages annually through 2028, but doing so might not be that easy. Cigarette sales continue to decline, and the company has struggled to find a next-gen product to replace that lost business.
If that trend continues, profit growth could turn negative, and the company will have to look to alternatives like selling the remainder of its stake in ABI to fund the dividend. By repurchasing that stock, it will also save about $220 million in dividend payments annually, and further repurchases can be justified similarly. Altria also recently sold rights to the IQOS tobacco heating system back to Philip Morris International for $2.7 billion, raising a significant bundle of cash.
Altria isn't about to run out of cash, but growing profits is likely to get more difficult. Any sign that its prized dividend (which now yields 9%) might be in jeopardy could cause a sharp sell-off in the stock.
The improved earnings guidance from the ABI stock sale is nice, but it doesn't solve Altria's long-term problems, and those issues shouldn't be ignored.
