Here's Why the Best Is Yet to Come for Altria Group

By Dan Caplinger Markets Fool.com

Investors in Altria Group (NYSE: MO) are already quite familiar with the success of the company's primary businesses. The maker of Marlboro cigarettes has been able to keep profits rising for its smokeable products division despite long-term trends away from smoking in the U.S., and smaller businesses like its cigar, smokeless tobacco, and wine units have contributed in a less substantial but still important way to Altria's overall performance over the years. Yet in one sense, the best is yet to come for Altria, because investors haven't yet seen the positive impact that the tobacco giant's new position in Anheuser-Busch InBev (NYSE: BUD) could have on its long-term growth prospects.

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Waiting for Anheuser-Busch InBev

From the beginning, when Anheuser-Busch InBev proposed acquiring beer rival SABMiller, in which Altria held a substantial stake, Altria supported the acquisition. As CEO Marty Barrington said at the time:

We strongly believe that the deal is in the best interest of our shareholders. Upon closing, Altria will continue to participate in the global brewing profit pool as a large and significant shareholder in what will be the industry's largest company.

Moreover, Barrington said he looked forward to working with the management team at A-B InBev, and the fact that Altria would get representation on A-B InBev's board of directors only added to the sense of partnership between the two companies.

Image source: Anheuser-Busch InBev.

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However, investors who watch Altria closely will have noticed that something was missing from the tobacco giant's fourth-quarter financial results: a contribution from the beer segment. The reason was that because of differences in accounting practices, Altria will report its share of Anheuser-Busch InBev earnings on a one-quarter lag. In other words, Altria's fourth-quarter results didn't include any A-B InBev results, while the tobacco company's first-quarter report this year will include A-B InBev results from the previous quarter.

What investors can expect from A-B InBev

The one-quarter lag means Altria shareholders can already predict what the impact of Anheuser-Busch InBev's earnings will be when they finally show up on Altria's financial statements. At the moment, it looks like the beer giant's first appearance might not be ideal.

Anheuser-Busch's fourth-quarter results weren't quite as strong as investors had expected. Revenue rose 1% on organic growth of just 0.2%, and net income per share was down substantially. Some of those declines were related to the SABMiller acquisition, but beer volume fell 3%, and volumes of non-beer products were down a sharper 4.4%. 2016 was a tough year for A-B InBev in Brazil, but the company tried to look at successes in Mexico and Europe, as well as broader-based gains in market share across many of its markets.

Moreover, Anheuser-Busch sees 2017 being a year of accelerating growth. The company now expects an additional $350 million in potential cost savings and synergies from SABMiller, with the total now standing at $2.8 billion. Already, the company has gotten about $800 million from the combination, and it expects to see the remainder come in by 2021.

The net result for astute investors is that if you're willing to follow A-B InBev separately, you'll get a leg up on your fellow shareholders in assessing the beer maker's contribution to Altria's overall results. Given how favorably A-B InBev sees its future prospects, it's understandable why Altria management seems so excited about the long-term potential of its investment in the beer business.

Altria will continue to get the lion's share of its profit from its core tobacco business, and that's consistent with the company's overall objectives. However, the diversification that comes with Altria's position in Anheuser-Busch InBev will be rewarding for shareholders. By tapping into a different market, Altria will be in a better position to weather inevitable storms and emerge stronger.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.