Altria (NYSE:MO) is well-known for its cigarette and tobacco products but it is also involved in wine distribution and production.
Contrary to Philip Morris International, Altria distributes and sells its products mainly in the U.S.
The company generates its revenue streams from the sales of some of the best-known cigarette and cigar brands in the U.S.
For example, Marlboro, Black and Mild and Copenhagen are some of the most popular cigarette and cigar brands marketed under Altria’s tobacco segment.
Aside from the tobacco business, Altria also has a major wine business that produces and markets premium wine labels, including ChateauSte. Michelle, 14 Hands and Stag’s Leap Wine Cellars.
While Altria may have owned some of the world’s best brands and have profited handsomely from the respective products, it may not necessarily be in the same situation for its financial health, its debt level in particular.
Investors are especially concerned with Altria’s rising indebtedness.
Therefore, in this article, we will dive into Altria’s balance sheets to find out how well Altria has been doing in terms of debt and leverages.
Apart from the debt metrics, we also explore Altria’s leverage by looking at the company’s debt ratios, including the debt to equity and debt to asset ratio.
Through the analysis of these ratios, we can reasonably find out the health of Altria’s balance sheets.
Let’s head out to the following topics!
Altria’s Debt And Leverage Topics
1. Total Debt
2. Net Debt
3. Debt To Equity Ratio
4. Liabilities To Equity Ratio
5. Debt To Assets Ratio
6. Liabilities To Assets Ratio
7. Debt Margin
Altria’s Total Debt
Let’s first look at Altria’s total debt which is shown in the chart above for the period from fiscal 2017 to 2021.
Altria’s total debt is the sum of the company’s all short and long-term debt.
The total debt consists of only Altria’s interest-bearing debt such as company-issued bonds, credit facilities, credit revolver, etc.
That said, the total debt does not include Altria’s non-interest-bearing liabilities such as accrued liabilities, deferred revenue, pensions, post-retirement benefits, etc.
All told, Altria’s total debt seems to have increased quite significantly in the last 4 years.
In particular, Altria’s debt level went up significantly to as much as $26 billion in 4Q 2018, driven largely by the company’s $14.6 billion borrowings in that quarter alone.
In December 2018, Altria entered into a loan agreement in connection with its investment in JUUL and Cronos which provided the company with borrowings up to an aggregate amount of $14.6 billion.
In other words, Altria used debt to finance its investment in JUUL and Cronos.
In subsequent quarters, Altria’s total debt increased again to close to $30 billion and continued to stay at this level all the way to Q3 2021.
For your information, Altria’s investment in JUUL and Cronos has turned out to be a bad decision as the company has incurred a series of impairment charges or write-downs that have severely impacted Altria’s profitability in 2019 and 2020.
Again, Altria incurred impairment charges in fiscal 2021 for its equity stakes in ABI and this has caused a big loss to the firm’s net earnings in fiscal 2021 Q3.
Altria’s Net Debt
Altria’s net debt consists of the company’s total debt net of total cash on hand.
In other words, the net debt is the debt that is left after subtracting total liquid assets from the total debt, including cash and cash equivalents and restricted cash.
That said, Altria still had quite a substantial amount of debt even after taking into account the company’s total liquid assets.
The reason is that Altria had only a small amount of cash on hand which averaged only $2 billion.
Similarly, Altria’s net debt increased significantly to more than $20 billion in 2018 Q4 due to the increase in indebtedness related to the investment in JUUL and Cronos.
As of 3Q 2021, Altri’s net debt stood at $25 billion even after taking into consideration the company’s $3 billion cash reserves reported in the same quarter.
Altria’s Debt To Equity Ratio
To find out Altria’s debt leverage with respect to equity, we will look at the company’s debt to equity ratio which is shown in the chart above for the period from fiscal 2017 to 2021.
According to the chart, Altria’s debt leverage seems to have increased quite considerably over the past 5 years.
Altria used to have a debt to equity ratio of only 1.00 prior to the investment in JUUL and Cronos in Dec 2018.
As you can see, the ratio began to rise to about 2.00 in 4Q 2018 and it continued to grow in subsequent quarters.
As of 2020 Q4, Altria’s debt to equity ratio has reached a stratospheric level at 10.00, indicating that the company’s debt leverage was about $10.00 dollars of debt to $1.00 dollars of equity.
While Altria’s debt load has remained constant since 2019, its debt to equity ratio continued to surge and reached a record high by the 4th quarter of 2020.
At this ratio, Altria’s debt leverage with respect to equity was extremely high as of 2020 Q4.
A detailed investigation into Altria’s balance sheets revealed that there are a few reasons that have caused the rising debt to equity ratio.
First off, Altria has actually been buying back its shares between 2017 and 2020 and this practice has partially shrunk the company stockholders’ equity but it was not the major factor.
The major kicker has been Altria’s declining profits coupled with the large dividends that the company has been paying all these years.
Remember about the prior discussion on Altria’s investment losses in JUUL, Cronos and ABI which has severely crippled the company’s profitability since fiscal 2019.
It turns out that the combination of these factors, including the share buyback, has managed to shrink Altria’s total equity to only $3 billion by the 4th quarter of 2020 from as much as $15 billion 3 years ago.
See the below snapshot of the statements of changes in Altria’s stockholders’ equity:
The above snapshot shows a 500% reduction in Altria’s stockholder equity between 2017 and 2020 as a result of the company’s reduced net earnings, cash dividend declared and share buybacks.
While the increase in indebtedness has partly contributed to the soaring debt to equity ratio, it was actually the shrinking equity that has been causing the rising debt to equity ratio.
Directly, Altria’s shrinking profitability, outsized dividend payouts and share buyback policies have all contributed to the rising debt to equity ratio between fiscal 2017 and 2021.
The share buyback may not be something to be worried about as Altria can reduce the buyback anytime it wants.
However, the declining net earnings coupled with the huge dividend payouts are trends to be worried about.
If Altria’s profitabilities continued to decline in the coming years and still keep the cash dividends, Altria may run into having negative stockholders’ equity.
In this situation, Altria would have no stockholders’ equity as its total liabilities have exceeded its total assets.
And this scenario has already occurred as of fiscal Q3 2021 as shown in the chart above.
As seen, Altria’s debt to equity ratio dived to the negative territory at -22%, driven largely by the negative shareholders’ equity reported in the same quarter.
In short, Altria is highly leveraged now and its rising debt to equity ratio is something to watch out for in coming quarters.
Additionally, I would definitely keep an eye on Altria’s debt to equity ratio.
Altria’s Total Liabilities To Equity Ratio
Total liabilities are everything that the company owes to 3rd parties, including debt and non-interest-bearing liabilities such as post-retirement benefits, pensions, deferred revenue, deferred taxes, etc.
All told, Altria’s total liabilities to equity ratio has been on a very similar trend as the total debt to equity ratio except that the magnitude of the ratio has been much higher.
Similarly, Altria used to have a very low total liabilities to equity ratio prior to its investment in JUUL, Cronos and ABI.
The ratio started to rise significantly in 2019 and reached an all-time high at 15.0 as of Q4 2020.
This figure continued into fiscal 2021 until Q3 2021 when it became negative at -30%.
While Altria’s debt has remained relatively stable since 2019, the total liabilities to equity ratio has continued to soar, thanks to the company’s reduced earnings and huge dividend payouts which have directly cut into its stockholders’ equity.
As a result, Altria is considered highly leveraged and the high liabilities with respect to equity are definitely something to pay attention to for all investors.
The negative total liabilities to equity ratio was primarily caused by the negative equity reported in the same quarter.
Therefore, as of Q3 2021, Altria has run out of shareholders’ equity as its total liabilities have exceeded its total assets.
Altria’s Debt To Assets Ratio
The total debt to assets ratio shows what makes up a company’s capital structure.
For example, in Altria’s case, you can see that its capital structure was 30% of debt in 2017 and that ratio has moved to as high as 60% in 2020.
The same ratio has soared beyond 70% as of fiscal Q3 2021, illustrating the rising debt coupled with the declining assets value of the company.
For your information, Altria’s total assets have actually shrunk from its high of $59 billion reported in 1Q 2019 to only $40 billion as of 3Q 2021, a level that was last seen in fiscal 2017.
The shrinking assets have been a result of Altria’s declining stockholders’ equity.
Altria’s declining profits coupled with the huge dividend payments have notably cut into Altria’s equity.
Therefore, the combination of the growing indebtedness, declining profits and dividend payments have contributed to Altria’s rising total debt to assets ratio.
As of 3Q 2020, Altria’s debt leverage was definitely on the high side at over 70% of its total funds.
This level of leverage should be watched from quarter to quarter so that it does not get out of hand.
Altria’s Total Liabilities To Assets Ratio
A similar uptrend is observed for Altria’s total liabilities to assets ratio.
Altria’s total liabilities to assets ratio was at an outrageous level at more than 100% as of Q3 2021.
Between fiscal 2017 and 2021, you can see that the ratio has been rising steadily and reached an all-time high in the 3rd quarter of 2021.
At over 100% of liabilities, Altria’s total funds or capital structure were made up entirely of liabilities.
As a result, Altria has no stockholders’ equity as of 3Q 2021 as its total liabilities have exceeded the respective total assets.
In this case, Altria’s financial health might be in jeopardy.
For your information, a high debt level, negative equity and declining profits are signs of a company in distress.
Going forward, Altria may have to cut dividends and reduce its stock buybacks if declining profits persist into the future.
Altria will have to see a significant profit growth to reverse the negative equity if it intends to keep the same cash dividend payouts and stock buybacks.
Altria’s Debt To Sales Ratio (Debt Margin)
The debt to sales ratio or debt margin measures Altria’s debt level with respect to revenue or sales.
The lower the ratio, the more efficient Altria is in generating sales with respect to debt level.
That said, Altria’s debt to sales ratio has shot up significantly to 130% in Q4 2018 from the prior ratio of 70%, driven mainly by the increase in borrowings to finance the company’s investment in JUUL and Cronos.
Despite the significant growth in the ratio in fiscal 2018, we are seeing a steady decline of the ratio from 2018 to 2021.
As of fiscal Q3 2021, Altria’s debt to sales ratio came in at about 133%, a decrease of nearly 10 percentage points from a year ago.
Altria’s declining debt margin may be the silver lining of all the negativities that we have seen so far.
To recap, Altria’s debt level has persisted at roughly $30 billion USD since fiscal 2018 and we have not seen a meaningful decline in the company’s indebtedness.
Additionally, Altria has been keeping its huge cash dividend payout and has even raised the payout in 2020 by 2%.
The huge dividend payout coupled with declining earnings has seriously reduced Altria’s equity to only $3 billion as of 4Q 2020, a 500% drop over the last 3 years.
As of fiscal Q3 2021, Altria’s equity has already become negative, indicating that the firm’s liabilities have exceeded the respective total assets.
This makes Altria’s debt to equity ratio hanging at an extreme level that has never been seen before and the latest result has even become negative due to the negative equity.
Moreover, Altria’s debt to assets ratio has already exceeded 100%, illustrating the extra liabilities over assets.
A silver lining among all the negativities is the declining debt margin for Altria.
Since fiscal 2018, Altria’s debt margin has been steadily on a decline and reached 133% as of fiscal 3Q 2021, a record low since fiscal 2018.
References and Credits
1. All financial figures in this article were obtained and referenced from Altria’s quarterly and annual filings available in Altria’s SEC Filings.
2. Featured images in this article are used under creative commons licenses and sourced from the following links: Elsa Olofsson and Peter Pike.
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