Shares of tobacco giant Altria Group Inc. (NYSE: MO) have long been a favorite of value investors looking for a safe and lusty dividend among S&P 500 stocks. The reason is pretty simple: the dividend will be the last thing to go when the going gets rough.
Right now, the COVID-19 pandemic has made things pretty rough. So why is Altria stock down 24% for the year to date while the S&P 500 is down less than half that much? This is supposed to be a safe stock.
When Altria reported first-quarter 2020 earnings in April, the top-line results were better than expected. Revenues of $5.1 billion beat an estimate of $4.6 billion. Adjusted earnings per share came in at $1.09, compared to an estimate of $0.98.
On top of that, new CEO Billy Gifford reinforced the central role the dividend plays in the company’s strategic planning. He told investors that Altria’s dividend “remains a top priority.” The company’s target payout ratio is still around 80% of adjusted earnings.
A Laundry List of Troubles
Altria’s $12.8 billion investment in e-cigarette leader Juul Labs has been a nearly total bust. Altria has written down all but $4.2 billion of that deal. Adding insult to injury, Juul now has taken Altria to court because the cigarette maker is trying to wriggle out of the 2018 deal.
The U.S. Federal Trade Commission (FTC) has filed a complaint alleging that the Altria-Juul Labs deal violated federal law. Director of FTC’s competition bureau, Ian Conner, said: “Altria and Juul turned from competitors to collaborators by eliminating competition and sharing in Juul’s profits.”
Canadian pot grower Cronos Group Inc. (NASDAQ: CRON) got a $1.8 billion investment from Altria in late 2018 as well. Over the past 12 months, Cronos stock is down 64%.
Altria reported that it does not believe that its investments in Cronos and Juul are material to its overall business. The company’s 10% stake in Anheuser-Busch InBev S.A./N.V. (NYSE: BUD) is also at risk. The brewer and wine merchant cut its dividend by 50% in mid-April. Altria said the fair value of its 10% stake is “well below” what it paid.
Yet, with a dividend yield of 9.27% at Friday’s closing price, shareholders haven’t a thing to complain about.
Hedge Funds Are (a Little) More Cautious
At the end of 2019, 54 hedge funds held positions in Altria stock, the most ever. That number dipped slightly to 51, according to Form 13-F filings for the first quarter. The so-called smart money may be taking a closer look.
A notable exception was David Einhorn’s Greenlight Capital, which bought into Altria with a purchase of more than 300,000 shares during the first quarter. Altria stock now accounts for 1.68% of Greenlight’s portfolio and is valued at $11.8 million. Greenlight also dumped its position in General Motors and reduced its position in Chemours.
As a percentage of its portfolio, Callodine Capital Management has the largest stake in Altria. Just over 10% of the hedge fund’s portfolio is invested in Altria. Based on dollar value, Ken Griffin’s Citadel Capital Management’s nearly 8.2 million shares are valued at around $315.5 million. That represents less than 0.2% of the fund’s portfolio.
Millennium Management sold its entire stake in Altria, valued at just under $3 million. Ken Fisher’s Fisher Asset Management fund dumped its $2.3 million stake, and Springbok sold its $10,000 stake.
Shareholders Are Getting Cranky Too
At last week’s annual meeting, shareholders voted by a narrow margin not to approve the company’s executive compensation plan. The nonbinding vote showed 51% against the pay package, a stunning reversal from the 94% approval just a year ago.
Last year, retiring CEO Howard Willard received $15.4 million in total compensation, with a base salary of $1.25 million. The median pay of an Altria employee last year was $142,246 (excluding only Willard). The CEO-to-median salary ratio was 109 to 1.
Total compensation for the company’s other six named executives came to around $36.8 million in 2019. The company reported 7,290 U.S. employees last year.
The non-performance of Altria’s investments in Juul and Cronos Group no doubt played a large part in the shareholder vote. The dividend does not seem to have made up for what investors saw as poor leadership. The ascension of former Chief Financial Officer Billy Gifford to the chief executive job did nothing to quell those feelings either.
Altria’s Debt Rating Remains Solid
In early May, Moody’s Investors Service maintained its A3 investment grade rating on Altria’s senior unsecured debt. Moody’s was particularly impressed by Altria’s “strong and improving operating margins and earnings as well as its strong liquidity and free cash flows.”
And about those investments? Moody’s is sanguine:
Moody’s expects JUUL’s contribution to Altria will continue to be immaterial over the next few years and e-vapor remains an important strategic initiative to transition away from combustibles. Altria’s overall performance will nevertheless remain strong due to pricing actions and growth in its other product categories including heated tobacco, cannabis, and oral tobacco.
Even if cigarette sales decline by 4% to 6% this year, Altria can raise prices to compensate. To top it off, Altria’s debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio was 2.4 at the end of last year, well within Moody’s range for the A3 rating.
Is Moody’s seeing something that everyone else is missing? Or is everyone else not seeing the forest for the trees?
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