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Cannabis-Connected

Besides, cigarettes and cigars, this company also sells smokeless products and wine. Earlier this year, it made a big investment in a Canadian cannabis producer to further broaden that product line plus offset slowing tobacco growth.

Altria Group Inc., $46.66, symbol MO on New York (Shares outstanding: 1.9 billion; Market cap: $88.4 billion; www.altria.com), is a U.S.-based holding company that operates in three main areas:

1. Smokeable products (cigarettes and cigars) supplied roughly 85% of Altria’s operating profits in 2018. This business includes Philip Morris, the largest cigarette maker in the U.S., with well-known brands such as Marlboro, Benson & Hedges, Merit, Virginia; Nat Sherman (premium cigarettes) and Middleton cigars.
2. Smokeless products, such as chewing tobacco, supplied 14% of overall earnings. Its top brands include Copenhagen, Skoal, Red Seal and Husky. Altria sells these products mainly in the U.S.
3. Wine (1%). This business operates wineries in Washington State and California, and distributes wines from foreign suppliers. Top brands include Chateau Ste. Michelle, Columbia Crest and 14 Hands.

Altria also has a 10.1% stake in Anheuser-Busch InBev (New York symbol BUD), the world’s largest brewer of beer. That investment is currently worth $19.2 billion, or 22% of Altria’s market cap.

The company’s sales rose 5.0%, from $24.52 billion in 2014 to $25.74 billion in 2016. However, revenue slipped to $25.58 billion in 2017, and dropped again to $25.36 billion in 2018.

Altria continues to do a good job controlling its costs. Due to legal restrictions, it also spends less and less on marketing. As a result, the company’s overall earnings jumped 48.7%, from $5.07 billion in 2014 to $7.54 billion in 2018. Due to fewer shares outstanding, earnings per share gained 55.9%, from $2.56 to $3.99.

In the quarter ended June 30, 2019, Altria’s revenue rose 5.0%, to $6.62 billion from $6.31 billion a year earlier. Its earnings improved 7.5%, to $2.06 billion from $1.91 billion; per-share earnings gained 8.9%, to $1.10 from $1.01.

Altria recently completed two major investments that it hopes will cut its reliance on slowing cigarette sales.

The company purchased a 35% stake in JUUL Labs Inc. for $12.8 billion. Privately held JUUL is a leading maker of e-cigarettes—electronic devices that heat various substances (in some cases, including nicotine) into a vapour that can be inhaled. Many consumers consider them safer than regular cigarettes, which is why demand for e-cigarettes has soared in the past few years. JUUL has about 75% of the U.S. e-cigarette market.

Due to their popularity with teenagers, the U.S. Food and Drug Administration recently announced new rules that would ban e-cigarettes from most convenience stores and gas stations and impose tougher age verification controls for online sales. Altria feels its expertise in dealing with increasingly tough rules on regular cigarettes will help JUUL overcome those restrictions.

In addition to e-cigarettes, Altria is looking to marijuana for future growth. In March 2019, it paid $2.4 billion (Canadian) for a 45% stake in Cronos Group, symbol CRON on Toronto, a Canadian producer of medical and recreational cannabis. The company will also get warrants that will give it the option to increase its stake in Cronos to 55%.

The deal puts Altria in a strong position to profit as more U.S. states legalize cannabis use. As well, its expertise with tobacco products should help improve the quality of Cronos’ products. This could involve making pre-rolled cannabis products with consistent tastes and effects.

As well, as one of the largest companies in the adult consumer products area, Altria can help Cronos navigate the extensive regulatory hurdles it faces. The company’s network of farm partners also has the potential to help Cronos develop outdoor cultivation in parts of the U.S. where that’s legal.

Altria borrowed the funds it needed for those investments. That increased its long-term debt from $11.9 billion at the end of 2018 to $27.1 billion as of June 30, 2019. That’s a manageable 31% of its market cap.

The company also recently agreed to buy 80% of Swiss tobacco company Burger Sohne for $372 million. That firm makes a nicotine pouch called On, which is similar to snuff. It expects to complete the purchase by the end of 2019.

Altria will likely earn $4.17 for all of 2019. The stock trades at just 11.2 times the 2019 estimate. That low p/e reflects investor concerns around falling tobacco use and increasingly stringent regulations. For example, the FDA now plans to ban menthol cigarettes. Adding menthol helps mask the flavour of tobacco smoke and reduces throat irritation. Menthol cigarettes account for 35% of the U.S. tobacco market.

Altria recently increased its quarterly dividend by 14.3%, to $0.80 a share from $0.70. The new annual rate of $3.20 yields a high 6.9%, and appears sustainable. However, that depends on the shrinkage it faces in its core tobacco business, and the degree of success it achieves in its new growth-oriented areas.

Altria Group is okay to hold for investors who are willing to take on some risk in pursuit of current high income.