Altria has a new plan to unlock value. It could be a warning sign for high-yield dividend stocks.

By | March 18, 2024

Altria (NYSE:MO) hasn’t had much good news to report lately, but investors on Thursday cheered the latest move, which will bring in billions in cash.

The Marlboro maker said it would sell a significant percentage of its stake in the company Anheuser-Busch InBev (NYSE: BUD). News of the sales sent the high-yield dividend stock up 2.2% on Thursday.

In a filing, Altria said it plans to sell 35 million shares of Anheuser-Busch in a public offering for $61.50 per share, and in addition it would sell the shares worth $200 million directly to Anheuser-Busch. In total, Altria expects to receive $2.4 billion from the sale. The underwriters also have the option to purchase an additional 5.25 million Anheuser-Busch shares from Altria, for which Altria would receive an additional $323 million, excluding any costs associated with the transaction.

Altria will still retain a majority of the stake it previously had in ABI, now worth about 8.1%, or about $10 billion, in the alcohol giant.

A pack of cigarettes.A pack of cigarettes.

Image source: Getty Images.

Altria’s plan for the new capital

Altria has long been a cash machine, paying out most of its profits to investors in the form of a generous dividend. Historically, the company has targeted a dividend payout ratio of 80%. Given its focus on returning capital to shareholders, it should come as no surprise that Altria is returning the new capital to shareholders, this time in the form of buybacks.

The company said it would increase its existing $1 billion share buyback program by $2.4 billion. It expects to complete this share buyback by the end of the year as part of an accelerated share buyback program.

CEO Billy Gifford said: “We have a long 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 capitalization currently around $80 billion, the additional buybacks will have an immediate effect, helping the company increase its full-year adjusted earnings per share 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 to save cash by reducing the number of shares on which it must pay dividends. Finally, this move will reduce ABI’s stock earnings, but it’s still a net positive for earnings per share.

Is it the right move?

Altria’s minority stake in ABI is a historical coincidence. 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 decreased again, but the tobacco giant still retained part of it.

ABI shares have underperformed the market in recent years, and the share sale makes sense in a number of ways. There is no strategic advantage for Altria in owning ABI. While there is a case for diversification, the company may be better off diversifying elsewhere at this point, given ABI’s performance.

If selling ABI shares allows Altria to increase its own earnings per share by buying back shares and saving money on dividends, that sounds like a compelling case for exiting ABI.

Why it could be a warning sign

However, there may be another motivation for the stock sale. Altria has committed to increasing its dividend by mid-single-digit percentages annually through 2028, but that may not be that easy. Cigarette sales continue to decline and the company is struggling to find a next-generation product to replace those lost sales.

If this trend continues, earnings growth could turn negative and the company will have to look for alternatives, such as selling the remainder of its stake in ABI to finance the dividend. Buying back those shares will also save it about $220 million annually in dividend payments, and further buybacks can be justified in the same way. Altria also recently sold back the rights to the IQOS tobacco heating system Philip Morris International for $2.7 billion, providing a significant bundle of cash.

Altria isn’t about to run out of money, but growing profits will likely become more difficult. Any sign that the prized dividend (which now yields 9%) could be at risk could trigger a sharp sell-off in the shares.

The improved earnings expectations from ABI’s stock sale are nice, but it doesn’t solve Altria’s long-term problems, and these problems shouldn’t be ignored.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.

Altria has a new plan to unlock value. It could be a warning sign for high-yield dividend stocks. was originally published by The Motley Fool

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