3 Reasons Altria Group Inc. Stock Could Rise

By Markets Fool.com


Image source: Altria Group.

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Long-term shareholders in Altria Group (NYSE: MO) aren't surprised at how well the stock has done lately. Having overcome many obstacles in the past, Altria continues to find ways to grow steadily despite the long-term trends toward less smoking in the U.S., and its stock has performed well, thanks to brand loyalty and pricing power that have offset any volume declines in the industry. In fact, some recent events could actually bolster Altria's potential for the future. Below, we'll look at three reasons why Altria investors should be bullish about what the tobacco giant has in store.

1. The SABMiller/Anheuser-Busch InBev deal continues moving forward.

One of the biggest potential mergers in history involves beer makers SABMiller and Anheuser-Busch InBev (NYSE: BUD). Anheuser-Busch intends to buy SABMiller in a deal that is now estimated to be worth $105 billion. The two companies have had to handle some unexpected bumps in the road, most notably the collapse of the British pound and the potential for shareholder unrest because of the implied reduction in value of the pound-denominated cash offer to most shareholders.

Overall, running through the checklist of pre-merger events has largely gone smoothly. The two companies received antitrust approval from the U.S. Department of Justice in July, following similar authorization from authorities in the European Union back in May. The two companies will have to divest a substantial amount of assets in order to get the deal done, including the sale of almost all of SABMiller's European beer business. Nevertheless, the beer makers had already expected to make sales of some of those assets, and the remainder shouldn't pose a problem to their business plan. With China also having signed off on the deal, it now appears likely that the two companies will merge by the end of 2016.

Once that happens, Altria has direct exposure to any share-price appreciation in Anheuser-Busch following the merger. With more than a 10% stake, Altria will be counting on the continued success of the beer giant to drive a substantial contribution to its bottom line. With all signs pointing to future growth, Altria should benefit from its stake in Anheuser-Busch once the merger is complete.

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2. New capital to deploy could bolster share prices.

As part of the Anheuser-Busch deal, Altria agreed to take the bulk of its compensation in the form of the beer maker's shares. However, Altria also stands to get about $3 billion in cash from the deal, and what Altria does with that cash could have a big impact on what happens to the stock price in the near term.

CFO Billy Gifford didn't lay out a definitive plan for what Altria will do with its newfound cash, but he did state in general terms what the company has done with available cash flow in the past. Altria's dividend is currently close to its 80% target for payout ratio, and the company just announced an 8% payout increase earlier in August. For the rest, in addition to stock repurchases, Gifford pointed to the potential for tender offers to buy back debt or refinancing operations to exchange one form of debt for another as other possible uses for the cash. Whatever it does, though, the impact on the stock price should be positive.

3. Alternatives to traditional cigarettes are picking up steam.

Altria hasn't hesitated to look for innovative products to pick up the slack from reduced numbers of smokers of traditional cigarettes. The company's Nu Mark subsidiary has worked hard to come up with e-cigarette and e-vapor products, and its MarkTen XL product has taken substantial market share in convenience stores and other mainstream retail outlets for the products.

Of even more potential benefit is the heated tobacco market. Overseas, demand for heat-not-burn tobacco products has been strong, and Altria is working on commercialization strategies of available technology for the U.S. market. The company will have to work with the U.S. Food and Drug Administration to substantiate claims of reduced risk of such products, but Altria is optimistic that it can navigate the regulatory maze and emerge with a winning strategy for the fast-growing market.

Most investors don't see Altria as a growth stock, but the company actually has some interesting projects that could increase its size and renew expansion of its brand. If Altria can execute well on these fronts and take advantage of the benefits of the SABMiller deal, then shareholders should see the rewards.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.