3 Ways Altria Is Boosting Profits

By Markets Fool.com

Tobacco giant Altria Group (NYSE: MO) has delivered impressive long-term results for shareholders by always focusing on its bottom line. Even in an industry where there has been an extensive secular decline in smoking, Altria has nevertheless managed to keep its sales easing higher and its profits climbing. That takes constant effort, and Altria's most recent moves show the many ways the cigarette maker seeks to make the most of its profit opportunities. Below, we'll take a closer look at three recent moves.

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Image source: Altria.

1. Keeping prices moving higher

One important way Altria has managed to stay ahead of the decline in sales volume of cigarettes is to use its pricing power. Investments in the company's key Marlboro brand as well as other favorites among consumers have given Altria a loyal following, and that has allowed the company to boost prices regularly in order to find the best balance between maximizing profit and not discouraging sales.

Within the last month, Altria made its latest move, boosting list prices on its cigarette brands sold through its Philip Morris USA unit. The increase amounts to 2% to 3%, or about $0.06 to $0.08 per pack, according to reports from Convenience Store News. That might not sound like much, but it's more than some analysts expected, and the move came earlier in the season than those following the industry were looking to see.

Investors should remember that the price increases they might see in their own channel checks don't always reflect more money going into Altria's pocket. Often, tax increases are what primarily drive big price boosts. Still, Altria looks closely at making pricing moves of its own in order to take maximum advantage of the conditions it sees in the market.

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2. Looking for manufacturing efficiencies

Altria doesn't just rely on its customers to generate greater profits. It has also turned inward, seeking to simplify its business operations and engage in cost management efforts in order to improve its core businesses and invest in future growth initiatives. During the company's third-quarter conference call, CEO Marty Barrington noted that Altria planned to consolidate a couple of its manufacturing facilities in order to streamline its operations and achieve a more efficient production system.

In particular, Altria announced two moves. The John Middleton cigar unit agreed to transfer its operations in Pennsylvania to its manufacturing-center site in Richmond, Virginia. In addition, the U.S. Smokeless Tobacco Company will transfer its operations in Illinois to an existing factory in Nashville, Tennessee, as well as to the Richmond manufacturing center.

The moves will come with costs, as Altria is agreeing to offer existing employees the chance to transfer along with the businesses. Those who choose not to move will get enhanced severance and benefits packages, with the expectation of the move being completed by the first quarter of 2018. Altria predicts it will save about $50 million per year once the moves are complete, adding to its previously announced productivity initiatives and showing just how important cost containment is for Altria.

3. Buying back shares

Altria hasn't hesitated to use financial moves in order to help boost its bottom line as well. Stock repurchases don't increase the amount of profit Altria earns, but they do decrease the number of shares across which that profit gets divided, and that can dramatically increase the company's earnings-per-share figures.

In the wake of the sale of beer maker SABMiller, Altria has found itself with a substantial amount of cash. The company is putting a big portion of that money toward buybacks, increasing its authorization from $1 billion to $3 billion. With buybacks expected to take place by mid-2018, shareholders can expect to see the impact soon. A $3 billion buyback for a company with a market cap of more than $125 billion won't be a huge mover, but it will still give Altria the incremental growth investors have counted on over the years.

Maximizing profit is important for any company, but Altria has been more successful than most in making it happen. With moves like these, Altria investors can feel confident about the tobacco stock's future.

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