- A comparison of opportunities with Altria ($MO (+1.86%))
Hello dear smokers and non-smokers!
Today we are going to talk about a dividend stock that many of you know by the acronym "BAT" or "BTI": British American Tobacco. Surprisingly, this BAT theme was able to prevail against the emerging markets using the example of Brazil (14 votes) and even against the nightclub theme as a continuation of the adult industry (11 votes) with 17 votes. That was very surprising for me.
There were also 38 comments alone with 49 exclusively positive responses to the other dividend stock "AT&T", which was announced as a secondary topic, was a clear indicator of passive income via dividends. Obviously you are more interested in this topic of dividend stocks in the Quickcheck than sector comparisons or exotic niche markets (eroticism, biofuels, etc.). I will take this on board and see how I align my suggestions in the near future.
Before we start with the stock analysis, my usual disclaimer:
DISCLAIMERThis is not investment advice. It is also not an invitation to buy/sell financial products. These are always associated with risks. I am only expressing my opinion here. You decide for yourself what you do. Therefore no liability.
FurthermoreThis is also not a moral judgment on investing in such industries. Similar to the erotic topic, I would like to ask you for discretion and adult behavior in the comments. Here on Getquin, this has worked perfectly so far. Please keep it that way.
"A Better Tomorrow"
Is this the motto of Bayer as a medically-oriented company? Are we perhaps talking about Waste Management, which now wants to take waste away from us even more efficiently?
Not at all. It is actually the motto of a tobacco company, or more precisely: British American Tobacco. What initially seems counter-intuitive is one of the many points that the following share analysis of BAT is intended to classify (see (1)). I present the following outline:
British American Tobacco (BAT) in figures 1.1 Business segments and the tobacco market - smoking as a male problem?
1.2 Corporate strategy - Why "A Better Tomorrow"?
2 British American Tobacco (BAT) in competition
2.1 Altria as a strategic counterpart - no games or head through the wall?
2.2Conclusion: Better conservative like Altria or progressive like BAT? A comparison of opportunities
1 British American Tobacco (BAT) in figures
1.1 Business segments and the tobacco market - cigarette market as a foreseeable Titanic? Smoking as a male problem?
Founded in 1902, BAT now has 52,000 employees worldwide. This formulation already indicates that BAT is active in its business segments differently from "regular" companies. In (2), it is described as an example that employees "also" work in factories, but also in research facilities and tech hubs. They can draw on a broad portfolio of well-known and sometimes very prestigious brands. Lucky Strike, Pall Mall and Kent are among BAT's better-known product brands - but they are not alone and are complemented by 200 other brands. These distribute their product range diversely across cigarettes, pipe accessories and rolling products. In short, all products for the enjoyment of smoking products (see (1), (2), (5))
BAT is just a tobacco company, why are sales staff driving around with the old product? What are the "tech hubs" supposed to do for a cigarette company?
Already on their website in (1) and (2) it is very difficult not to see the clear progressive statements regarding the disruption of the existing cigarette business. I deliberately read various texts in different categories and all of them were united on this red line of the "We need to move away from the smoking health-threatening image to a replacement product company" mantra. Tech hubs as places of synergetic collaboration are to serve BAT as progress towards this future. In other words, huge areas like Silicon Valley in the USA, where tech companies carry out thematically similar research and production together. We can therefore see that external marketing is heavily based on this concept and I will therefore go into this focus in more detail in 1.2 (see (1), (2), (3)).
In addition to this marketing rhetoric, the current product range with its individual focal points is of course extremely interesting. So where does BAT stand now?
Loosely based on (5), the business areas can be divided loosely into 5 categories. We will leave out the "Other" category for now. The 5 individual categories are therefore (see (5)):
- Cigarettes and other combustible products
- Conventional oral products
- Vapourizers, i.e. electric vaporizers
- Tobacco heaters
- Novel oral products
That reads a bit more complicated than you would expect from a tobacco company, doesn't it? So here's a brief explanation of what we're actually talking about here and what the differences are.
Let's start with 1): A cigarette is a product made of filter and paper that contains cylindrical tobacco and is intended for consumption by adults. The products in this business segment are therefore dependent on an external source of fire and cannot normally ignite themselves. We will come back to this later and see why this is important (see (6)).
This business segment accounted for 85.8% of sales in 2021 and thus amounted to 22.029 billion pounds sterling. For the sake of readability, I will abbreviate this currency to GBP from now on. It is immediately noticeable that the share of these classic products from 1) has fallen by 3.18% compared to the previous year 2020, when the share was still 88.3% and GBP 22.752 billion. This is hardly surprising, as the marketing strategy indicated has already pointed to this transformation process. As a FTSE-listed company, the focus of this product category is on the UK and ... (see (5)).
No, it does not. In fact, around 46% of total sales are generated in the USA and only in second place do we see Europe - but combined with North Africa and about half of the share of 22.6%. Looking exclusively at Great Britainwhich BAT actually does, this results in a share of only 0.8% with GBP 0.209 billion. There are several reasons for this, which correlate in particular with the much larger number of buyers in other countries. It is therefore hardly surprising that, due to this regional sales structure, BAT is included in both the FTSE 100 or in the STOXX UK 50 is listed. The latter comprises the 45 to 55 largest companies in the UK in terms of market capitalization. BAT has a market capitalization of USD 84.11 billion, which is roughly comparable with GBP 75.23 or USD 86.33 billion (see (5), (9)).
Accordingly, BAT is the 138th most valuable company in the world. Compared with its US competitor Altria, which we will get to know in Chapter 2, it is in 146th place with a market capitalization of "only" USD 80.10 billion (see (9), (10)).
Why is this important?
As we can see, the product "cigarette" with its other combustion products is apparently declining in sales. Even if GBP 22.029 billion is still a lot of money, it is a decline of 3.18% within one year. Tolerable? While (11) shows a moderate upward trend from 2016 with GBP 14.13 bn to GBP 25.877 bn in 2019, this statistic gives us little insight into the exact distribution of this prominent main product business area. Looking at these figures in isolation, you might think the world is a slightly growing market for BAT for the foreseeable future and that all the marketing talk is overly cautious reasoning for the garbage can.
However, if we look at a few statistics on global tobacco consumption, the proportion of smokers in Germany and the cost trend for cigarette products, we see an interesting development. For example, one of BAT's main competitors recorded a massive 32.58% decline in cigarette sales between 2012 and 2021. The competitor's response? More advertising? Cheaper smaller products? No (see (13)).
The exit from the cigarette business in the medium-term time horizon. The decision can also be understood using German figures as an example. Why should we look at Germany, of all places, as a tax hell? One of the key points is that BAT, together with Phillip Morris and Imperial Tobacco, has an 80% share of the German cigarette market, which comes from industrial production. Retail brands from discounters, for example, only account for 13.3%, so that we have a strongly brand-dominated business environment here. BAT therefore plays a key role with its two competitors, so that we can use Germany as an example of a cigarette buyer at industrialized country level (see (14)).
What can be seen?
Essentially, there are three dominant factors why the cigarette environment is no longer in the fast lane in Germany (see (15), (16), (17)):
- High tax rate of approx. 50% tobacco tax plus VAT per pack, resulting in a relatively high rate of untaxed or smuggled cigarettes (16)
- Increasing health awareness, especially among young people (17)
- 5 tax increases between 2002 and 2007 in DE
- Proportion of smokers in DE has been falling continuously since 2000 (15)
So we can see that cigarettes as a basic product are being seriously undermined, at least in a leading industrialized country. Only 18,8% of the German population are smokers. This may still be above the OECD-average of 16,5 percent, but in particular it shows a declining interest in this product. It is interesting to note that men are more likely to take up cigarettes, although the difference between men and women is not as great as I had initially assumed. Approximately one in five men take up cigarettes, while 12.8% of women do so. So we are comparing every 5th man with around every 8th woman in 2022.
Is this worth a shout of joy for the women's group?
No - because I have only given you general statistical data that requires statistical interpretation.
Inter...what? Yes, I also like Inter Milan, but what does that have to do with it?
Let's take a statistic from 2018 as an example. I deliberately used an outdated source from 2018 because it predicted the future course very well.
While 42.8% of men and 29.3% of women smoked in 1995, the figure for men fell from almost 43% (almost half) to 24.2%. That is a decrease of 43.72%. What is the situation for women (cf. (18)).
Women's cigarette consumption was much more constant than that of men. A comparison between 1995 and 2018 shows a similarly high rate of 1-(18.5 (2018) / 29.3 (1995)) = 36.86 percent. However, the standard deviations or, in simpler terms, the declines per year are not as massive as for men. For example, you can hold your ruler up to the men's curve from 2003 and use the data to draw an almost perfect straight line downwards at an inverted 70 degree angle. This is based on a triangle with a gamma angle opposite the 90 degree angle, i.e. to the standard left of the hypotenuse. (Alpha=90 degrees, Beta=20 degrees, Gamma=70 degrees)
Don't worry, I just wanted to save you from having to open the source and illustrate this clearly.
So if we do the same with the women, we would get more of a horizontal straight line with an even smaller beta angle, if it weren't for the 2018 survey. This was known to be 18.5 and represented a decline of around 21% compared to 23.4. The men's value only fell by around 14% in the same period.
What does this mathematical-geographical drivel tell us?
While men have reduced their smoking rate more quickly, women remained faithful to cigarettes between 1995 and 2003 and increased their share by 4.1 percent. Only then did a gradual reduction in the proportion of women smokers set in. I particularly like the way the graph shows the gap between women and men. In 2018, the gap was only 5.7 percent. In other words, around 6 percent more men smoke compared to the female cohort. Compared to 1995, this is a significant reduction (see (18)).
So is BAT losing its main clientele in Germany: men?
On the basis of the statistical evaluations presented, this could initially be answered in the affirmative. With 97.24 billion euros spent per year on medical services relating to illness and death, this is of course a positive development for society.
However, alongside this very positive development for men, there is a rather disappointing performance for women. I would like to deliberately address this problem here, because I think everyone can assess the dangers of tobacco products for themselves. If I smoke cigarettes all the time, sit in front of the TV at work and at home and because there was no time again I eat fast food quickly so that I can still watch my series, I am exposing myself to an originally male lifestyle problem.
Did you notice it? What kind of person were you thinking of - a man or a woman?
If this article had appeared 20 years earlier, for example, the answer would probably be: a man. Now I'll take it to the extreme: Let's assume this person has a heart attack before their 60th birthday.
What do you think the probability is that this person is female? 5%? 25%?
The truth is: 47 (!) percent.
That's right - 47 percent of heart attacks today are caused by women. The 35 to 54 age category performs particularly badly here due to obesity and smoking. Nevertheless, it is striking that with the decline in cigarette consumption, the number of heart attacks in both sexes combined has fallen by 30 percent over the last 15 years (see (19), (20)).
Less pleasant is the fact that a heart attack is particularly noticeable in women through asymptomatic complaints such as nausea and shortness of breath. This often does not lead quickly to the correct diagnosis. Every second woman remains alone after a heart attack (cf. ibid.).
It is also important to know the negative sides of the investment. We now know the reasons for restructuring:
- Main product is declining and polarizing negatively
- Health awareness has also increased in the industry itself
In the following, I would therefore like to present the remaining products from the top of the strategy "A Better Tomorrow" strategy strategy and share my assessment of the share.
1.2 BAT's corporate strategy - why "A Better Tomorrow?"
Now that we have understood the restructuring constraints, the question of the slogan "A Better Tomorrow" arises against the background of its practical implementation.
So how does BAT want to shape a "Better" future? Essentially, this should happen via the following building blocks (see (1), (5), (18)):
- New product ranges such as vaporizers, cannabis products, etc. as examples.
- A broad awareness campaign about the dangers of smoking itself on the BAT homepage
- Increased presentation of substitute products
Now let's take a look at the substitute products. In 2020, they accounted for 11.8 percent of total sales. In 2021, this contribution was already a good 14%. If we look at emerging products such as vaporizers, we see a green wall, so to speak, with sales increases of +14.73% to 51.72%. Figures that, after reading Chapter 1.1, one would not have expected from a company in a collapsing business environment.
But what are these products? In short, they are, for example, battery-powered vaporizers that heat the e-liquid as a liquid to a high temperature in order to generate vapour. This is inhaled using a vaporizer. Whether this is native smoking or not is often discussed in various rounds and will not be discussed further here for the time being (see (21), (22)). There is also classic chewing tobacco such as snus from Sweden or American chewing tobacco. In the more modern chewing tobacco segment, BAT sells chewing tobacco under the VELO brand, which consists of cellulose fibers from eucalyptus and pine trees, among other things. A pharmaceutical standard is also guaranteed. Unlike vaporizers, tobacco heaters are designed to produce aerosols by heating the tobacco rather than burning it. Similar to vaporizers, the product is then inhaled. Glo is the brand name of BAT. Of course, this was only a rough illustration, but it should be enough to get us started (see (21)).
In my opinion, BAT is heavily dependent on this product direction - a top team with only one star player cannot survive in the long term - other products must be brought in to replace it. I'm deliberately not naming a British team at this point. So let's take a look at how the e-cigarette market is performing in general. While 20.4 billion euros were generated worldwide in 2022, this volume is expected to rise to 24.03 billion euros in 5 years. Annualized sales would therefore have risen by 3.33% each year if this were the case. This would thus counteract the stagnating to declining cigarette market and would therefore tend to be desirable.
So will we get there with this product portfolio? Will the restructuring go smoothly?
The answer is: YES. As many of you will have noticed, I will soon be writing an article on the emerging market Brazil. E-cigarettes are banned there, which is currently the largest emerging market. Mexico and Thailand are also subject to corresponding bans (see (24)). This means that the product may not be traded there. In the case of Brazil, it is apparently permitted to import these liquids for personal use in accordance with (26). Otherwise, no legal purchase is possible there. The national health inspectorate confirmed this in July of this year and does not want to shake or even discuss the ban introduced in 2009. The reason given is that e-cigarettes are often tempting to use and are therefore socially undesirable. As a result, the trade in this important substitute product for BAT in Brazil has largely drifted into illegality and therefore offers no sales. It could also be argued that BAT thus has competition in the shadows and the economic situation becomes even more diffuse (cf. (25), (26)).
So if you are interested in this now largest emerging market Brazil, I am happy about every new follower and constructive comment:)
Let's take a brief look at India as a well-known representative of the emerging markets. Here it is less problematic for BAT to sell its goods, but it is still "far from perfect". India is divided into 29 states, of which only 7 have a ban on the sale and import of e-cigarettes. However, this also includes regions such as Punjab with a population of around 28 million in the border area with Pakistan, which may make importing more difficult. As a medium-sized Indian state, Punjab is therefore also significant (see (26), (27)).
How can BAT's share price cope with this?
For a rough assessment, I check the following parameters analogous to AT&T. In this way I ensure a reasonably comparable standard, which structures my share valuation better for myself:
- Free cash flow (FCF)
- Sales development
- KGV / KBV / KUV
- Net margins
- Earnings per share etc.
We start with the market value. BAT's earnings increased year-on-year from GBP 73.883 billion to GBP 74.28 billion from 2019 to 2022 after a short-term weakness in 2020. This corresponds to growth of 0,5344%. No, I haven't forgotten the "times 100". It's actually a good half percent growth in enterprise value. Is that a problem? Is BAT a "lame duck" in its sector (see (5))?
To find out, let's compare BAT's share price in 2017 with the overall market in the form of the MSCI World Tobacco Index. This index contains large and medium-sized companies in 23 industrialized countries and also contains a weighting of 23.31% in favour of BAT. This means that BAT is the second largest factor in the sector comparison and is only followed by Phillip Morris with a weighting of 38.66%. Overall, this constellation makes it clear that only pure tobacco companies are included and that, in a certain anti-SRI manner, only renowned tobacco companies have been selected. A total of 6 companies make up the composition of the index. I deliberately chose this index because it represents 100% of BAT's market environment with its main competitors and does not include any companies that perhaps produce a few intersection products with a tobacco background but actually belong in a different category (see (28), (29)).
An interesting picture emerges via Marketscreener: Although BAT accounts for the above-mentioned approx. 23% of the index mentioned above, only rudimentary similarities are visible in the chart comparison. While BAT ultimately achieves almost the same percentage of -32% over a 5-year period, the MSCI Tobacco is at -30.83% and almost always outperforms BAT over the entire period. However, if we reduce this to two years, BAT breaks through the index chart in February 2022. If we reduce this to one year again, we get even clearer data. From now on, BAT outperforms the index, in some cases significantly, with an increase of up to 40%, while the index tends to be between no change (0%) or a smaller decrease (-5%) on average (see (28),(29)).
If the MSCI World is included in this comparison, the P/E ratio for the tobacco index was 13.89 and for the MSCI World 16.26, both with a downward trend as at September 2022. The price-to-book value factor is to the detriment of the tobacco index and at 3.79 is higher than that of the MSCI World. What does this mean for the equity world of tobacco companies and BAT?
Despite its annualized return of 3.48% over 10 years, the tobacco index currently has a higher P/B ratio compared to the MSCI Worlds' 8.11%. This means that I get less book value in the company for my €100 investment. This tends to indicate an overvaluation compared to the gold standard of the industrialized countries and can be viewed critically in light of the problems described in section 1.1. We should also not forget that the tobacco index consists of only 6 companies and therefore has a higher default risk with less profit displacement through diversification. Also, the aim of the tobacco index is not primarily to reflect general global economic growth, but rather to represent low-risk tobacco companies with a corresponding cash flow payout (see (28), (29), (30)).
What does this mean for BAT?
BAT is obviously in a market environment with a higher P/E ratio than the MSCI World and has historically participated in a lower loss market YTD. This means:
- The expectation for BAT is greater than for the general market to increase sales and grow
- The market is currently considered to be more valuable than the overall market, resulting in a higher expectation of the share price
- The market is not currently pricing in the obvious problems described on a larger scale compared with the market as a whole and its problems
- There is a flight into supposedly safe sectors with dividends such as the tobacco sector
Can this also be seen in isolation for BAT?
Yes - in certain parts even very clearly. Let's take a look at the classic P/E ratio of BAT alone. The P/E ratio was 13 times earnings in 2019 and fell to a value close to 9.25 in 2021. At the same time, the share price initially fell from GBP 32.3 per share to 27.1 in 2020 and rose slightly to 27.3 in 2021. Theoretically, this data is not sufficient to assess the P/E ratio without known earnings. We know that the P/E ratio and the share price have fallen. We can therefore already see that earnings have either risen, remained stable or fallen. This is therefore not enough and we need data on earnings (see (31),(32)).
These profits have risen from GBP 2.49 in 2019 to GBP 2.96 in 2021. On the positive side, the net margin as a ratio of sales to profit also increased from 22.1% to 26.5% in the period mentioned. We have therefore been able to generate more profit from our turnover each year. This tends to be very desirable, but how much turnover was there (see ibid.)?
The turnover of BAT in the period from 2019 to 2021 are about as emotionally stirring as watching wall paint dry. In 2019, BAT achieved GBP 25.827 billion and, as stated, was hardly able to generate any sales growth (see (32),(33)). Nevertheless, leading analysts expect earnings per share to continue to rise, which is only possible via a) rising sales, b) better net margins, c) lower expenses and d) stability, with the number of shares remaining roughly the same. For 2023 for example, an profit increase of 16,15% is expected (see (32),(34)). This means that BAT could probably increase its dividend from GBP 2.16 in 2021 to up to GBP 2.82 if the analysts are right.
What needs to be right?
First of all, we need sufficient free cash flow, which BAT can use to pay the dividend without any problems. As many of you will have noticed from my Altria or AT&T Quickcheck, I have a highly allergic reaction to free cash flow payouts > 100%. Especially in the current environment of rising interest rates and the resulting burden on debt financing, I find it incomprehensible to set these payouts so high.
In the case of BAT, we see earnings per share of GBX 313.11 and a dividend of GBX 235.18, i.e. an FCF payout of 75.11%. I personally prefer this payout below 80%. It is purely a preference on my part and also depends on whether we are talking about a REIT or a sector known for dividends. In the case of BAT, this is the case, so I like the rather low payout ratio. Altria also performs comparably well here at 76.8% (see (32), (34), (35), (36)).
What does this mean for the dividend?
Strictly speaking first of all
nothing. Past data makes it difficult to predict the future. Companies such as Altria claim to have a maximum payout ratio of 80%, but this is difficult to estimate for the future due to a generally declining market and a dependence on new trends in the market. Will BAT and Altria be able to afford the dividend even if the replacement products do not catch on and/or restrictions continue in emerging markets such as Brazil and India? These are just a few thoughts on P/E ratios and sales trends (see (36)).
Let us now look at the P/E RATIO. As I have mentioned in many other posts, it indicates what we get back in book value from the company for an exemplary €100 investment. We already know that the tobacco sector is quite expensive at the moment and that we will probably have to dig deeper into our pockets for the corresponding share. In 2013, BAT's P/B ratio was still at 9.89 and peaked at 15.62 in 2015, meaning that the share was valued at more than fifteen times its earnings at that time. In 2020, the P/B ratio was only 1.06 and thus approached the statement that you get almost €100 book value in the company for €100 invested (see (37), (38)).
Why is this important?
Put simply: If I get not one but two scoops of ice cream for my euro (now probably more like €2), I generally find that pleasing. Unless it's cucumber ice cream.
It's the same with BAT. I could go on and on about book value, equity and P/B ratio. But it's also the 6th hour for me, so here are the essentials:
The P/B ratio is particularly appealing to me if the group's financing is equity-driven rather than debt-oriented. Why?
The more non-debt-laden mass in the company on the liabilities side of the balance sheet, the better and, in my view, the more honest the P/B ratio is. For example, what good is a debt-ridden tech company that has a P/B ratio of 1 but is financed exclusively via debt at 90%? As this could become a lengthy discussion, I would just like to say that I am particularly interested in the increasing
equity of BAT from GBP 61 billion to GBP 67 billion. Of course, the equity ratio of 48.85% in 2021 is still too low for me, but it's a good start. If you also look at the equity values and their ratio via (39), you can see a slow but gradual development towards less debt and more self-financing.
This trend is also reflected in the less praiseworthy factor "long-term total liabilities per share". While GBP 28 million in debt was purchased per share, this is now "only" GBP 23.95. So a good 14% less long-term debt per share. This is a good 14% less long-term debt than in 2017, meaning that the Group has managed to reduce a significant part of its debt burden within 5 years. This is good for BAT, good for investors and initially bad for the lending bank (see (38), (39)).
What does the dividend actually look like?
In 2015 the dividend yield was 4,08 % and, as part of the debt reduction, has risen to almost 8% in 2021 doubled. The dividend was GBP 1.54 in 2015 and GBP 2.18 in 2021. So you can see that you don't necessarily have to rely on high dividend yields in advance. If you had bought BAT in 2015, for example, the equivalent of €45 per share would have been necessary for a dividend yield of just 4%. Today, this ratio is approximately €2.47 dividend to a share price of around €38.52. This results in a dividend yield of 6.43%, which compared to 2015 is still 6.43/4 = 61% more dividend yield. Within the topperfromers of the tobacco industry, BAT thus operates with a competitive dividend yield, has good net margins in my view and would like to diversify its product range due to the declining business model "cigarette group" (see (40), (41))
What does the competition do differently using Altria as an example?
2.British American Tobacco (BAT) in the competitive battle
Altria as a strategic counterpart - no games or head through the wall?
Many of my YouTube subscribers will already be familiar with the Altria Group. I had already briefly reviewed it there in a so-called "quick check" to see whether it was worth a closer look.
So let's start with Altria's business areas. A quick look at Marketscreener, among others, shows that this business segment structure is much easier to understand than that of BAT. For the latter, I had to pick out individual products as shown above and even explain how they work. Altria itself operates a strikingly simple and relatively intuitive business model, which can be divided into 4 main categories excluding "Other" (see (42)):
- Cigarettes
- Oral tobacco products
- Cigars
- Wine
I think most people will have read the definition of what a cigarette is from above or will have come across this extremely rare product, which is not for sale anywhere, perhaps on a safari.
The product group "oral tobacco products" is similar to BAT in that it is chewing tobacco, but here at Altria it is not divided into modern and classic products. Chewing tobacco is chewing tobacco and that's that. Cigars are listed separately here and are tobacco products that are rolled together using several tobacco leaves and have a wrapper. Altria also sells wine (cf. ibid.).
So what is so special about Altria?
Essentially, Altria has taken a different turn to BAT and has increasingly focused on its core business. We'll come back to Juul later. What is important for us are the business segments and their sales.
We see that 84.1 percent of Altria's turnover comes from cigarettes. Brands such as Malboro, L&M, Chesterfield etc. account for 21.88 billion US dollars in sales. The chewing tobacco division accounts for 10 percent of sales, while the rest is accounted for by the aforementioned cigars, wines and others. This means that almost everything revolves around the classic cigarette or chewing tobacco. The sales situation becomes particularly complex when we look at the regional distribution. We immediately recognize the emerging markets such as China, Brazil and India at the top of the list.
No, we do not. Altria's sales per region are limited 100% to the United States and are therefore very easy to handle. However, it is also directly dependent on the USA and its inflation and economic development. The annual turnover is USD 26.013 billion in 2021, with Altria shares listed in the S&P 500 and even the S&P 100. Both are composed of market capitalization and already indicate that Altria with its brands is one of the globally important players in the tobacco scene (see (41), (42)).
The company's market value fell sharply from 2019 to 2021. The decline amounted to 14%. The P/E ratio was also negative in 2019, as a net loss was generated. The dividend yield nevertheless remained high at 6.6% to 8.3%. Market capitalization is calculated at around 4 on average over the last 3 years and is therefore significantly higher than that of BAT at 2.4.
What does this mean?
In comparison, BAT is therefore cheaper in terms of share price and the associated required sales growth. cheaper than Altria. The enterprise value points in the same direction and is stated at 3.16 for BAT and 5.24 for Altria in relation to sales. The P/B RATIO of Altria was negative in 2021 and will remain negative for the next few years until 2024, according to the analysts. Let's take a closer look at the year 2021 for Altria:
While Altria made $1.34 in earnings per share, they paid out $3.52 in dividends. As you know, I get allergic reactions to payouts greater than 1. Now we would be at a factor of approx. 2.64 (see (44)).
It can happen. This is certainly only an exception?
No. Because even in 2020, Altria generated USD 2.40 per share and paid out USD 3.40. Not a good trend. At the same time, sales are stagnating at around USD 19.8 bn to USD 21.2 bn and are running in a sideways channel. Net margins have been negative in some cases and are far below those of BAT. This is not meant to be a song of praise for BAT, but rather a question for Altria. In 2021, the net margin was around 12%. BAT's was 27%. Earnings per share are not expected to increase to the same extent as BAT in the future either (cf. ibid.).
The worst sight, however, is the constant debt ratio of around twice EBITDA, a negative book value per share of 88 US cents and a future with the same negative signs. Has Altria ever tried to get out of the situation with substitute products?
Yes, but it didn't end well for Altria. On December 20, 2018, the management of Altria bought the start-up Juul. This cost the company 12.8 billion US dollars. This gave them their own replacement product company that...
No they did not have. These USD 12.8 billion have only for 35% stake in Juul. Using a simple rule of three, you arrive at a dizzyingly high valuation that dwarfs that of AirBnB, for example. Once again: a start-up that had been in existence for three and a half years. It came as it had to - the 70% market share in e-cigarettes came to nothing for Altria. The FDA stepped in and took issue with the youthful style of e-cigarettes, the unclear health situation and other problems that Juul and Altria were unable to offer appropriate solutions for. As a result, another stick flew in Altria's direction: not only was the money for Juul virtually lost, but a reduction in the nicotine content of cigarettes in the USA is currently pending. This could theoretically pose a massive threat to Altria's core cigarette business. With less nicotine, less addiction, fewer customers, less money. What is perhaps socially desirable is now threatening such an important wing for Altria and, in my perception, is setting the company back years in its much-needed readjustment in the tobacco market of the future (see (45)).
2.2 Conclusion: Better conservative like Altria or progressive like BAT? My opinion
As we have seen not all tobacco is the same. We have analyzed key characteristics of the cigarette business based on the market, the products and on Altria and BAT, and have realized how important a fundamental analysis of players in a supposedly dying market is. I personally find this battle of the 6 giants in one market very fascinating and will therefore continue to monitor this market. In addition to the terrible health risks in the more detailed environment, which I had to cut for length, I was also shocked by what I see as Altria's completely excessive dividend policy. It is also regrettable that, from Altria's point of view, they wanted to take the right path towards a replacement product with fewer side effects, but unfortunately opted for a landmine which has not only set Altria back years, but has also cost it a lot of money.
Basically, I only see opportunities in companies that have recognized the signs of the times and understand that it is now time for the next generation of smoking cessation products. I will stay on the ball and continue to follow all the players!
So I hope you enjoyed my article from today. Before this turns into another bachelor's thesis, I would like to end by saying that despite the serious background, I really enjoyed this topic and it has only confirmed my opinion.
What do you think? Do you invest in BAT or Altria directly? Is anyone invested in the tobacco index?
Who else would like to see the Altria Quickcheck:
https://www.youtube.com/watch?v=BLngGtj-Mgg&t=3s
I look forward to your constructive comments! Follow me for more insights into exciting companies and exotic markets!
Your Bass-T
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