Altria Group (NYSE:MO) is probably one of the best-run companies in the world.
Its businesses span from cigarettes to oral tobacco and wine.
As recent as 2019, the company also has ventured into smokeless products such as the IQOS through a licensing agreement with Philip Morris International.
Altria has a huge moat in these businesses where there are literally no compelling competitors.
The tobacco and cigarette businesses are difficult to break into due mainly to the tough regulatory environment and also the required huge upfront capital.
For this reason, Altria is a very profitable company and has made tonnes of profits over the years.
In this article, we will explore Altria’s profitability from the perspective of several metrics.
Let’s take a look.
Altria’s Gross Profits
When we explore Altria’s profitability, the first thing to look at will be the gross profit.
The gross profit expresses Altria Group’s combined or total profitability after accounting for only costs of goods sold.
Other expenses such as research and development, marketing and administrative costs are not taken into consideration yet for gross profit.
All told, Altria’s gross profits have been rising steadily between 2017 and 2020 as shown in the chart above.
On a TTM basis, Altria reached a record high in gross profit at slightly more than $13 billion as of 4Q 2020.
Year over year, Altria’s gross profit grew 2.3% in the 4th quarter of 2020.
Throughout 2020, Altria has been able to have a steady growth in its gross profits despite the tough business environment.
While the growth rates may well only be a few percents, it was an extraordinary feat for Altria considering that the company was eking out steady gross profitabilities amid the COVID-19 outbreak.
To date, Altria’s companies have not experienced any material impact associated with consumers’ movement restriction as the majority of retail stores in which Altria’s products are sold have been deemed as essential by the authorities and will remain open.
Altria’s Operating Companies Income (OCI)
Altria’s operating companies income or OCI is a metric specifically designed to evaluate the performance and allocate resources to a business segment by the management.
The OCI is a non-GAAP measure that comes after the gross profit and it accounts for marketing, administrative as well as r&d costs that have been excluded from the gross profit.
The OCI is similar to the operating income, but with certain items excluded, and is meant for measuring Altria’s core operating strength before any other non-core items such as interest expenses, earnings from equity investments, gain or loss from financial instruments, etc are taken into considerations.
That said, Altria’s OCI has been on a rising trend between 2017 and 2020 as seen in the chart above.
As of 2020 Q4, Altria’s OCI reached slightly more than $11 billion on a TTM basis, a record high for the company.
Year over year, the 4th quarter result grew nearly 6%.
On a long-term basis, Altria’s OCI has been on a rising trend.
Altria’s OCI grew the most between 2019 and 2020 despite the COVID-19 outbreak.
While Altria is still very far off from being a growth stock, the steady rise in the OCI means a lot to the company and investors.
In this case, the growing OCI represents a growing operating strength and thus, a growing profitability.
In short, Altria’s core businesses are making money and thriving.
Altria’s Operating Income (EBIT)
As mentioned, the operating income is similar to the OCI but with some items excluded in the OCI, including the amortization of intangibles, general corporate expenses, corporate asset impairment and exit costs.
The operating income includes these items.
Additionally, the operating income or earnings before interest and taxes (EBIT) is a GAAP measure whereas the OCI is not.
All told, Altria’s operating income is having a similar trend as the previous OCI.
As of 2020 Q4, Altria’s operating income reached a record high at $10.9 billion on a TTM basis, representing a year-on-year growth rate of 6%.
On a long-term basis, Altria’s operating income has been growing and it has been doing so even during one of the worst outbreaks in the world.
The growth of the operating income is an important signal for not only Altria but also the shareholders as it indicates a strengthening core operation.
In other words, Altria’s core businesses are thriving.
All in all, Altria is making money on the back of its growing core businesses.
Altria’s Earnings Before Income Taxes (EBT)
When we take into consideration of Altria’s interest expenses and gains or losses from equity investments as well as from financial instruments, Altria has not been doing so well.
As seen in the chart above, Altria’s earnings before income taxes or EBT has been going downhill for the period from 2017 to 2020.
Altria’s earnings before taxes were the worst between 2019 and 2020, with some quarters reaching less than $1 billion on a TTM basis.
However, Altria’s EBT grew again throughout 2020 and was seen totaling as much as $6.9 billion in Q4 2020.
Prior to 2020, Altria has suffered from one of the worst blunders in its history – investments in JUUL and Cronos.
A detailed investigation into Altria’s financials revealed that Altria has incurred impairment charges that spanned multiple quarters in 2019.
Some of the impairment charges were a result of JUUL investments that have cost Altria nearly $10 billion in losses.
Additionally, Altria also has losses on Cronos-related financial instruments totaling more than $1 billion in 2019.
As a result, Altria has incurred losses totaling more than $10 billion between 2019 and 2020 which then led to the decline in earnings before taxes.
The worst may have been over for Altria in 2020 since its earnings before tax have already been rising significantly in the same year.
Altria’s earnings before tax reached its record high in 2020 at more than $6 billion by the 4th quarter, indicating that the company’s profitability is on track to recovery.
Altria’s Net Earnings Attributable to the Company (EAT)
The next profitability metric after earnings before tax will be the earnings after-tax or net earnings attributable to Altria.
Keep in mind that the EAT is a GAAP measure and is the final profits available to Altria’s common stock shareholders after accounting for all expenses incurred by the company.
The earnings after tax should be less than the earnings before tax when you take into account the taxes that need to be paid.
As seen in the chart, most of the earnings after tax are considerably less than the earnings before taxes and some of them are even in the negative regions after accounting for taxes.
Similar to the downtrend observed in the EBT, Altria incurred huge losses between 2019 and 2020 due mainly to the impairment charges related to the company’s JUUL investments.
As of 2020 4Q, Altria’s earnings after tax was about $4.5 billion on a TTM basis, a 100% jump from the quarter a year ago.
Additionally, Altria’s earnings after-tax have also been recovering from its low and have been heading towards a new high in 2020, suggesting the company is on track to grow its profitability again.
Altria’s Earnings Per Share (EPS)
Altria’s earnings per share or EPS is the final profitability metric that expresses the company’s profits on a per-share basis.
The EPS is also one of the most important numbers available to investors and most share prices are valued based on the EPS.
For example, the PE ratio is one of the valuation metrics based entirely on the EPS.
However, the EPS can be manipulated in a way that is referred to as the financial engineering in which the company buys back a considerable number of shares outstanding.
The result will be a smaller number of shares outstanding and hence, a higher EPS.
To rule out the effect of the share buyback, investors may supplement their review of the EPS with other profitability metrics, including the gross profit and operating income.
These profitability metrics rule out not only the share buyback effects but also non-core-related incomes as well as expenses that may distort the realistic profitability nature of a company.
That said, Altria’s earnings per share or EPS have been on a downtrend between 2017 and 2020.
Similarly, the declining EPS has been driven largely by Altria’s losses in some of its investments, including JUUL and Cronos.
As of 2020 Q4, Altria’s EPS stood at $2.39 on a TTM basis, representing more than 100% growth than the quarter a year ago.
Again, Altria’s earnings per share have also recovered quite substantially as of 2020 4Q, suggesting the path to recovery is happening.
Altria’s Adjusted Earnings Per Share (Adjusted EPS)
Altria has its own earnings per share metric which is referred to as the adjusted earnings per share.
The adjusted earnings per share or adjusted EPS is a non-GAAP measure calculated by Altria and excludes certain income and expense items in which Altria management believes are not part of the underlying operations.
Altria considers these special items as highly variable, unusual or infrequent, are difficult to predict and can distort the underlying business trends and results.
For this reason, Altria created its own earnings per share or adjusted EPS to rule out these special items effect.
Similar to the OCI, Altria’s adjusted EPS is designed to specifically track the core profitability but on a per-share basis.
That said, Altria’s adjusted EPS looks vastly different from the non-adjusted EPS seen in prior discussion.
For instance, Altria’s adjusted EPS totaled $4.36 on a TTM basis in Q4 2020 compared to the GAAP EPS figure of $2.39 in the same quarter.
Additionally, the long-term trend of both curves also looks vastly different.
In this case, the adjusted EPS has been on a rising trend whereas the GAAP figures have been going in the opposite direction.
The rising trend in the adjusted EPS is due mainly to the adjustment made to exclude special items such as the investment losses in JUUL and Cronos.
As a result, Altria’s adjusted EPS has not been distorted by these special items and focuses only on the company’s core profitability.
That said, it is a relief to see Altria’s adjusted EPS growth in the last 3 years.
Between 2017 4Q and 2020 4Q, Altria’s adjusted EPS have grown nearly 30% on an annual basis, indicating that Altria’s core businesses have performed well and are thriving.
Additionally, Altria bases its dividend payout on the adjusted EPS.
In this case, Altria intends to pay out as much as 80% of the adjusted EPS as dividends.
Therefore, Altria’s dividends tend to grow when the adjusted EPS is growing too.
In conclusion, Altria’s profitability grew on all metrics, particularly the gross profits, and the operating income, indicating the strengthening of the company’s core businesses.
However, when impairment charges were taken into consideration, Altria suffered severely in profitability.
Specifically, Altria’s earnings before tax, earnings after tax and EPS were all having the worst results between 2019 and 2020.
In those periods, Altria incurred multiple huge impairment charges related to the investment losses in JUUL and Cronos.
However, these profitability metrics recovered substantially by the 4th quarter of 2020, suggesting that Altria has been on the right track to recovery.
1. Financial data in this article was obtained and referenced from Altria’s financial statements available in Altria’s SEC Filings.
2. TTM measures come from the author’s own calculations.
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