Dont get me wrong. My tobacco position of my portfolio is massiv near 50%. But altrias numbers are very bad. -10% volume decline is massive and now the ocf is dropping too. Njoy is getting beaten by Bats and On! Is getting beaten by PM. Mo with 100% us and combustible premium products is the least favorable tobacco stock imo at this valuation.
I always appreciate pushback, but I would firmly disagree with much of this framing. The US, despite the proliferation of illicit vapes, is not a bad market to be concentrated into when it is by far the most lucrative market in the world - all USD cash flows look quite good compared to PM and BAT emerging market cash flows, historically. As highlighted in the piece, volumes can not be looked at in isolation, nor should one specific part of the business. on! being 2nd place to PM does not mean that it can not produce a meaningful contribution, and the oral tobacco segment as a whole is wildly profitable. If you look at the last 12 years, total segment profits have marched higher and volumes have remained roughly stable. Shifting from enterprise to equity, Altria is less levered than BAT and PM and has a clear pathway to monetize BUD further. I hold all of these names, and more, as disclosed. PM and BAT have many great features, but I won't pretend to hold a crystal ball. There are all kinds of future scenarios where any one of these far outperforms the others.
Altria's decision to focus on its "premium" cigarettes business to grow profits rather than volumes is not unlike Diageo's approach to spirits (i.e., "drinking better, not more"). Better than engaging in a race to the bottom in the lower quality brands/products space when the end goal is maximizing value for shareholders. Marlboro's share of premium trending up over the last few years is a good sign.
Doesn't look stellar within the framing of continual downtrading to discount. However, I very much agree that over the long term the premium spot is the best spot to be in, especially when contextualizing the change in excise as well as things like minimum pricing laws.
You can go back over the last decade and see quarters in which y/y drops occurred. This wasn't the first time and won't be the last. Good to look at the pushes and pulls and see how it can change overtime. More so, even with operations shrinking, the per-share cash flows can increase, which I would argue is what investors should spend more time assessing.
When the ocf is shrinking over the years less and less share buybacks will occure. For Growth or Decline one should look at top line numbers (revenue/Cashflow) in my opinion.
But that isn't the whole picture. It's quite the assumption that operations will shrink no matter what going forward. But, even with a business shrinking at an enterprise level, things such as net financing and changes in capital structure can result in growing per-share value. And for shareholder returns, per-share figures matter.
But per share basis is just a questions of capital allocation. If MO is paying out 100% of fcf in dividends or debt repayment would your statement be the same? What would you say about altria if they payout 100% fcf in dividend for ever and never again buyback shares. Your EPS and Cash flow per Share would shrink YoY. They dont shrink because they buy back enough shares now not because the business is growing.
Without enterprise level revenue and cashflow you cannot buyback shares.
Being 'just a question of capital allocation' covers all aspects of acting as an external investor or internal operator. This is the point I am making, the company is not paying out 100% as a dividend. Whatever would be used to retire share capital could be retained and reinvested into new growth initiatives. It is just that at the moment repurchases are a clearer path to best serving shareholders. When a substantial % of free cash is being returned via dividends, a reduction in share capital reduces the total paid out. That reduction can outpace a decline in overall earnings, thus driving per-share results and providing financial flexibility to the operator.
Dont get me wrong. My tobacco position of my portfolio is massiv near 50%. But altrias numbers are very bad. -10% volume decline is massive and now the ocf is dropping too. Njoy is getting beaten by Bats and On! Is getting beaten by PM. Mo with 100% us and combustible premium products is the least favorable tobacco stock imo at this valuation.
I always appreciate pushback, but I would firmly disagree with much of this framing. The US, despite the proliferation of illicit vapes, is not a bad market to be concentrated into when it is by far the most lucrative market in the world - all USD cash flows look quite good compared to PM and BAT emerging market cash flows, historically. As highlighted in the piece, volumes can not be looked at in isolation, nor should one specific part of the business. on! being 2nd place to PM does not mean that it can not produce a meaningful contribution, and the oral tobacco segment as a whole is wildly profitable. If you look at the last 12 years, total segment profits have marched higher and volumes have remained roughly stable. Shifting from enterprise to equity, Altria is less levered than BAT and PM and has a clear pathway to monetize BUD further. I hold all of these names, and more, as disclosed. PM and BAT have many great features, but I won't pretend to hold a crystal ball. There are all kinds of future scenarios where any one of these far outperforms the others.
Excellent piece
Thank you, Hermann
Excellent piece as usual. Many thanks.
Thanks, GD!
Altria's decision to focus on its "premium" cigarettes business to grow profits rather than volumes is not unlike Diageo's approach to spirits (i.e., "drinking better, not more"). Better than engaging in a race to the bottom in the lower quality brands/products space when the end goal is maximizing value for shareholders. Marlboro's share of premium trending up over the last few years is a good sign.
Doesn't look stellar within the framing of continual downtrading to discount. However, I very much agree that over the long term the premium spot is the best spot to be in, especially when contextualizing the change in excise as well as things like minimum pricing laws.
Operating cashflow down 4% YoY. Now Cashflows are shrinking too
You can go back over the last decade and see quarters in which y/y drops occurred. This wasn't the first time and won't be the last. Good to look at the pushes and pulls and see how it can change overtime. More so, even with operations shrinking, the per-share cash flows can increase, which I would argue is what investors should spend more time assessing.
When the ocf is shrinking over the years less and less share buybacks will occure. For Growth or Decline one should look at top line numbers (revenue/Cashflow) in my opinion.
But that isn't the whole picture. It's quite the assumption that operations will shrink no matter what going forward. But, even with a business shrinking at an enterprise level, things such as net financing and changes in capital structure can result in growing per-share value. And for shareholder returns, per-share figures matter.
But per share basis is just a questions of capital allocation. If MO is paying out 100% of fcf in dividends or debt repayment would your statement be the same? What would you say about altria if they payout 100% fcf in dividend for ever and never again buyback shares. Your EPS and Cash flow per Share would shrink YoY. They dont shrink because they buy back enough shares now not because the business is growing.
Without enterprise level revenue and cashflow you cannot buyback shares.
Being 'just a question of capital allocation' covers all aspects of acting as an external investor or internal operator. This is the point I am making, the company is not paying out 100% as a dividend. Whatever would be used to retire share capital could be retained and reinvested into new growth initiatives. It is just that at the moment repurchases are a clearer path to best serving shareholders. When a substantial % of free cash is being returned via dividends, a reduction in share capital reduces the total paid out. That reduction can outpace a decline in overall earnings, thus driving per-share results and providing financial flexibility to the operator.