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How Do Altria Balance Sheets Look?

A cannabis plant. Flickr Image.

Altria (NYSE:MO) is a leading cigarette and tobacco player not just in the U.S. but also globally.

The company’s major revenue streams come from selling some of the best-known cigarette and cigar brands in the world.

For example, Marlboro, Black and Mild and Copenhagen are a few 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 considerably from the respective products, it may not necessarily be the same case for its financial health, its debt level in particular.

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.

Through a couple of ratios, including the debt to equity and debt to assets ratio, we can reasonably find out the health of Altria’s balance sheets.

Let’s not wait!

Altria’s Total Debt

Altria total debt

Altria total debt

* Total debt consists of Altria’s current and long-term debt.
* Total debt is a GAAP measure and is shown here as reported in Altria’s balance sheets.

Let’s first look at Altria’s total debt which is shown in the chart above for the period from 2017 to 2020.

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.

However, 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 Q4 2020.

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.

Altria’s Net Debt

Altria net debt

Altria net debt

* Net debt consists of Altria’s total debt net of total cash on hand.
* Net debt is a GAAP measure and comes from the author’s own calculation using current and long-term debt, cash & cash equivalents and restricted cash.

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 around $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 4Q 2020, Altri’s net debt stood at $24 billion even after taking into consideration the company’s $5 billion cash reserves reported in the same quarter.

Altria’s Debt to Equity Ratio

Altria debt to equity ratio

Altria debt to equity ratio

* Debt to equity ratio is a GAAP measure and comes from the author’s own calculation using current and long-term debt, and total equity as reported in Altria’s balance sheets.

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 2017 to 2020.

According to the chart, Altria’s debt leverage seems to have increased exponentially over the past 4 years.

Altria used to have a debt to equity ratio of only 1.00 prior to the investment in JUUL and Cronos.

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 dollar 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 outsized dividends that the company has been paying all these years.

Remember about the prior discussion on Altria’s investment losses in JUUL and Cronos which has severely crippled the company’s profitability in 2019 and 2020.

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:

Altria statements of changes in stockholders' equity

Altria statements of changes in 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 2017 and 2020.

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 a negative stockholders’ equity.

In this situation, Altria would have no stockholders’ equity as its total liabilities have exceeded its total assets.

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 level.

Altria’s Total Liabilities to Equity Ratio

Altria liabilities to equity ratio

Altria liabilities to equity ratio

* Total liabilities to equity ratio is a GAAP measure and comes from the author’s own calculation using total liabilities and equity as reported in Altria’s balance sheets.

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 is on a very similar trend as the total debt to equity ratio except that the magnitude of the ratio is much higher.

Similarly, Altria used to have a very low total liabilities to equity ratio prior to its investment in JUUL and Cronos.

The ratio started to rise significantly in 2019 and reached an all-time high at 15.0 as of Q4 2020.

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 is definitely something to pay attention to for all investors.

Altria’s Total Debt to Assets Ratio

Altria debt to assets ratio

Altria debt to assets ratio

* Total debt to asset ratio is a GAAP measure and comes from the author’s own calculation using total debt and assets as reported in Altria’s balance sheets.

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 rising total debt to assets ratio has been a direct result of Altria’s borrowings in connection with its JUUL and Cronos investments.

Additionally, Altria’s total assets have actually shrunk from its high of $59 billion reported in 1Q 2019 to only $47 billion in 4Q 2020, a level that was only seen in 2017.

The shrinking assets have been a result of Altria’s declining stockholders’ equity.

Altria’s reduced profits coupled with the huge dividend payments have notably reduced 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 4Q 2020, Altria’s debt leverage was definitely on the high side at over 60% of its total funds.

This level should be watched from quarter to quarter so that it does not get out of hand.

Altria’s Total Liabilities to Assets Ratio

Altria liabilities to assets ratio

Altria liabilities to assets ratio

* Total liabilities to asset ratio is a GAAP measure and comes from the author’s own calculation using total liabilities and assets as reported in Altria’s balance sheets.

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 90% as of Q4 2020.

Between 2017 and 2020, you can see that the ratio has been rising steadily and reached an all-time high in the 4th quarter of 2020.

At over 90% of liabilities, Altria’s total funds or capital structure were made up of less than 10% of stockholders’ equity.

As mentioned, Altria may run into a scenario where it will have a negative stockholders’ equity in which its total liabilities exceed the 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.

Altria’s Total Debt to Sales Ratio

Altria debt to sales ratio

Altria debt to sales ratio

* Total debt to sales ratio is a GAAP measure and comes from the author’s own calculation using total debt and TTM revenue as reported in Altria’s quarterly and annual statements.
* TTM sales or revenue are revenue net of excise taxes to rule out the effect of growing excise duties.

The debt to sales ratio measures how efficient Altria is in using debt to generate revenue or sales.

The lower the ratio, the better the efficiency is for Altria in using debt to generate sales.

That said, Altria’s debt to sales ratio has shot up significantly to 1.30 in Q4 2018 from the prior ratio of 0.70, driven mainly by the increase in borrowings to finance the company’s investment in JUUL and Cronos.

Altria’s debt to sales ratio increased by nearly 100% in the Q4 2018 quarter alone.

In the following quarters, Altria’s debt to sales ratio has remained at this elevated level all the way to 2020 4Q.

In fact, Altria’s debt to sales ratio has slightly increased to 1.41 as of 2020 4Q and has been at this level since 2019.

The rising or leveling trend of the ratio does not bode well for Altria’s fundamentals as it indicates either a rising indebtedness or a stagnant or even a declining revenue.

While Altria’s total debt has risen, its revenue has remained flat or has not grown fast enough compared to the growing debt.

All in all, Altria’s debt to sales ratio needs to drop to show that the company can effectively use debt to generate sales or revenue.

Altria’s Cash On Hand to Total Debt Ratio

Altria cash to debt ratio

Altria cash to debt ratio

* Cash on hand consists of cash and cash equivalents and restricted cash and are extracted directly from Altria’s balance sheets.
* Cash on hand to total debt ratio comes from the author’s own calculation.

The cash on hand to total debt ratio shows the proportion of Altria’s total cash or highly liquid assets with respect to its total debt amount.

According to the chart, Altria’s total cash was about 17% of the company’s total debt as of Q4 2020, which was significantly higher than the pre-COVID ratio of only 6%.

During the COVID time, Altria has significantly increased its liquid assets with respect to debt.

Altria increased its cash reserves to prepare for what might come as a liquidity crisis that would negatively impact its businesses.

Fortunately, Altria’s free cash flow has been solid and it has not experienced any liquidity crisis as of 2020 Q4.

Conclusion

Altria is a solid company but has run into a high debt and low profitability scenario.

Additionally, Altria has been keeping its outsized 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.

This makes Altria’s debt to equity ratio hanging at an extremely high level that has never been seen before.

Altria needs to make more money in the coming quarters or years to fix its current predicament.

Otherwise, Altria may run into having negative equity in which its total liabilities exceed its total assets.

References and Credits

1. All financial figures in the charts in this article were obtained and referenced from Altria’s quarterly and annual filings available in Altria’s SEC Filings.

2. All ratios come from the author’s own calculations.

3. 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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