Tobacco giant Altria Group (MO 0.15%) has long held an interest in the alcoholic beverage industry, owning Ste. Michelle Wine Estates and a roughly 10% stake in beer company Anheuser-Busch InBev for years.
Altria sold Ste. Michelle over the summer for $1.2 billion, and now investors are wondering what the company might do with its stake in AB InBev, which is currently worth $11.5 billion. With AB InBev's stock and Altria's stock both still well off of their multiyear highs, here is why selling its stake could reignite Altria's share price.
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What once was, is no longer
AB InBev used to be an outstanding dividend-paying stock, passing a portion of its large profits to shareholders each year. As a stakeholder in the company, Altria received passive income from those dividends. In 2018, this amounted to $890 million in 2018, more than 12% of its net income that year.
But AB InBev dramatically cut its dividend in late 2018, trying to conserve cash to begin paying off the massive debt load it had acquired due to the company buying SABMiller for $104 billion in 2016 in a cash-based megamerger. Altria's total dividends from AB InBev dropped from $2.53 per share in 2016 to just $0.42 in 2020. Thus far, in 2021, the company has paid out just $0.44 per share.
AB InBev still has to pay down more of its balance sheet and has been slowed by the pandemic, as lockdowns stunted business by limiting restaurants, bars, and social gatherings. The company still carries about $90 billion in total debt, compared to about $120 billion after the SABMiller merger. Altria just isn't getting the cash flow from those dividends that it used to, and it's hard to predict when it might get back to that.
Putting the Juul losses to good use
Altria's stake in AB InBev is under a lockup period until Oct. 10 due to terms of the SABMiller merger. At that point, Altria will be free to sell some, all, or none of its AB InBev shares.
AB InBev is hardly paying anything in the way of dividends; there is little to no cash flow coming to Altria, so it could put the value of its stake to better use once it sells. The value of the stake is currently about $11.5 billion, 13% of Altria's entire market cap.
Imagine you pay for a 100-foot long swimming pool, but it comes with 13 feet of it fenced off so that you can't enjoy swimming in that section. Investors might feel similarly about Altria right now! The stake in AB InBev is a notable chunk of Altria's market cap, but investors are getting virtually no benefit out of it now that AB InBev has dramatically cut its dividend.
Altria paid $12.8 billion for a 35% stake in electronic cigarette company Juul in 2018 but has written down most of its value after Juul attracted regulatory scrutiny for its impact on youth vaping. Altria could help offset taxes from selling AB InBev with its Juul losses and further incentivize the company to bail on AB InBev.
Proceeds could spark the stock
So what could Altria do with the proceeds from a sale to make shareholders happy? A lot of things. Management could use the money from the sale to pay down its own balance sheet. Altria borrowed to fund the Juul acquisition and currently has $28.2 billion in debt. If it wanted, the company could dramatically lessen its debt load and regain some financial flexibility.
Additionally, it could choose to buy back a significant amount of its shares, which might make more sense than paying down its debt. Altria pays a generous dividend that yields 7.9% on the current share price. It no longer has to pay that dividend for each share that the company buys back, so it's almost like paying off a debt with a 7.9% interest rate. It would make more financial sense to buy back its shares because its debt carries a fixed interest rate of just 4.1%.
A valuation springboard for investors to jump off of
Altria's stock price has fallen a long way from its multiyear highs in the $70s seen in 2017. But over that time, the company has grown its earnings per share from $3.39 to the $4.62 analysts estimate for the entire 2021 year.
When a company earns more, but the stock price goes down, it creates a more appealing valuation. The stock currently trades at a forward price-to-earnings ratio of just 10, less than half of the forward P/E ratio of the S&P 500 (currently at 22). Meanwhile, Altria pays a dividend that alone yields almost as much as the S&P 500's historical annual returns. Altria seems like a bargain with both short- and long-term upside, and selling its stake in AB InBev might be the fuse that ignites the stock.
