U.S. cigarette giant Altria Group (NYSE: MO) has delivered stellar returns to investors, both in 2016 and throughout the past half century. Yet those returns haven't come without substantial risks. In the past, Altria has found ways to overcome litigation, regulatory scrutiny, taxation, and opposition from consumer advocacy groups, still making profits that have impressed its investors. As we enter 2017, Altria continues to face risks, and it will be important for the company to overcome them in order to stay successful. Below, we'll focus on three different types of risks that Altria will see in 2017.
Image source: Altria Group.
Risk 1: An adverse tax environment could keep getting worse.
One problem that Altria has faced for a long time is that government entities are quick to impose taxes on cigarettes and other tobacco products. The federal government has an excise of $1.01 per pack on cigarettes, but the bigger threat has come from state governments. Unlike the federal government, which can rack up deficits as high as it chooses, state governments typically have to maintain balanced budgets and have limited borrowing capacity. As a result, taxing tobacco is a fertile source of revenue. Moreover, with health advocates calling for measures to reduce smoking and encourage smokers to quit, tobacco taxes are often politically attractive as well.
Altria and its peers saw the full brunt of that hit in November, when California passed a $2 per pack increase in its cigarette tax. Similar measures in other states failed, but the California loss will hit Altria hard, given that the state is the second-largest market in the U.S. and makes up roughly 8% of national sales volume. If budget pressures keep affecting other states -- and signs of fiscal need in states like Indiana have already surfaced -- then Altria could face higher taxes elsewhere that could further eat into its ability to sustain its profit levels.
Risk 2: Rising gas prices could cut discretionary income among consumers.
Altria gets a substantial percentage of its revenue from sales at gas stations and convenience stores, and purchases at such locations are highly dependent on the price of gasoline. A few years ago, when gas prices hit the $4 per gallon mark, consumers were paying so much at the pump that they had less money left over to buy discretionary items like cigarettes. That hurt sales for Altria and its competitors. By contrast, over the past year and a half, rock-bottom gasoline prices have been a factor in Altria's solid growth, and company executives have specifically noted the positive impact on its performance.
As we enter 2017, oil prices are at their highest levels in a year, and some see them headed much higher. The course of energy prices will be uncertain, but if recent trends continue, then they could have a negative effect on how much money gas station shoppers have to spend on cigarettes and other tobacco products.
Risk 3: Altria's stake in beer might not produce anticipated profits.
Finally, Altria has high hopes for the recently completed merger of Anheuser-Busch InBev (NYSE: BUD) and SABMiller. Altria's partial ownership in SABMiller has translated into a 10% position in Anheuser-Busch InBev following the merger, and Altria will be able to pull its proportional share of revenue and profits onto its own consolidated financial statements.
Proponents of the merger have noted that Anheuser-Busch InBev has a commanding position in several key markets following the combination, and that has the potential to produce better results than the weakening profits that SABMiller had delivered recently compared to past years. However, Anheuser-Busch has had to make divestitures of key assets in order to gain approval for the merger, with the most recent being its $7.8 billion sale of brands in Eastern Europe to Japan's Asahi Group. Even with an anticipated boost to profits in 2017 compared to 2016 levels, A-B InBev hasn't convinced investors that it will be able to earn as much as it did in 2015.
Altria's stake in Anheuser-Busch is long term in nature, so fluctuations in profits won't worry its corporate leadership. For investors, though, some could be nervous if A-B InBev doesn't work out as well as hoped.
Altria has several risks to overcome, and these three risks are likely to rear their ugly heads over the next year. If Altria can execute well to deal with these risks, then the stock could produce another strong performance in 2017.
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