July 22, 2021

Breakingviews: Altria better off giving cash away than burning it

by Breakingviews.

Altria could soon have cash to burn. The $87 billion purveyor of Marlboro cigarettes is selling a wine business for $1.2 billion to focus on smokes. But the company run by Billy Gifford still has a $13 billion chunk of Anheuser-Busch Inbev, which it inherited from the sale of Miller Brewing, and can exit in October. The risk is that will tempt Altria with more bad acquisition choices.

The Richmond, Virginia-based company is working to streamline its buzz-inducing portfolio amid a general industry move toward smokeless nicotine consumption. It’s selling Ste. Michelle Wine Estates to private equity firm Sycamore Partners for $1.2 billion. The company also has 197 million shares in A-B Inbev, the brewer of Budweiser and other mainstream beer brands.

But certain restrictions on the sale of that stake expire on Oct. 10. Overall, it hasn’t been a great investment for Altria. The value of the stake has fallen 50% since Altria inherited it in October 2016. As a result, disposing of a so-so investment seems reasonable – and could about double Altria’s cash.

Which is also the problem. Altria has proved itself adept at poorly timed dealmaking. The company acquired a 45% stake in cannabis firm Cronos in March 2019. Cronos shares have since declined almost two-thirds. Worse, Altria has taken more than $11 billion in write-downs on its investment in vaping firm Juul Labs, roughly 90% of what it paid in 2018, after the firm got tangled up in lawsuits.

Transforming a business, like smoking, to cope with shifting consumer habits and regulatory vicissitudes is no easy task. Altria’s former international arm, Philip Morris International, is leading the charge into smokeless tobacco. Altria sold 103 billion sticks in 2020, a 7% decline from two years earlier. But the business is still attractive, with earnings expected to grow almost 14% by 2023. And it generates cash: Altria’s dividend yield is above 7%.

Of course, using fresh cash from divestments to pay a fat dividend or buy back stock isn’t as exciting for a management team as launching into a new business, the way Philip Morris has. But at least Altria shareholders could be assured their money wouldn’t go up in smoke.

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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