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Altria Group Inc (MO) Continues To Shine

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Altria Group (MO)Despite changing tobacco habits around the world, declining cigarette volumes, and huge legal settlement fees, Altria Group Inc (NYSE:MO) recently reported fourth-quarter and full-year 2012 earnings of $2.06 per share, up from $1.60 in 2011. This EPS growth of nearly 30% highlights the resilience of the tobacco industry and Altria Group Inc (NYSE:MO) in particular.

With dividends reinvested, Altria Group Inc (NYSE:MO) has been one of the best performers in the S&P 500, ever. I believe these recent results highlight the company’s strengths and ability to continue outperforming the market.

Altria’s success owes mostly to its diversification. However, part of the continuing success depends on strategic product price increases and cost-cutting.

In particular, Altria Group Inc (NYSE:MO) owes part of its success to its investment in SABMiller , which it received after selling some of its own brewing operations to SAB. Altria’s investment comprises a 27% holding in SABMiller, two seats on the board of SAB’s directors, and a portion of the company’s profits.

So how does SAB contribute?

Altria’s first full year of holding a stake in SAB was 2011, and its extraordinary costs for 2011 amount to $730 million. We can assume these were acquisition related.

2012 saw the first full year of the Altria – SAB working relationship. Unfortunately, once again, Altria Group Inc (NYSE:MO) recorded a loss from its holding in SAB, is in-part down to the acquisition by SAB of the Australian brewer Fosters.

To explain this further, here is a chart of SAB’s earnings:

Fiscal Year Ended March 31 2008 2009 2010 2011 2012
Revenue 8,497 8,813 8,904 9,741 10,477
Net profit 1,140 1,277 1,305 1,645 2,807
EPS (GBP) 0.8 0.8 0.8 1 1.8
Free cash flow -231 90 1,317 1,625 -4,804

Although SAB reported a profit for 2012, the company’s cash flow was actually negative by £4.8 billion, due to the acquisition of Fosters in 2011.

Within Altria’s 2012 full-year earnings report, its holding in SAB is marked as “special items.” These special items are currently losses due to the acquisition of Fosters and costs related to SAB’s ‘business capability programme.’ Both the Fosters costs and the business capability program costs span the 2011 and 2012 accounts. However, part of the acquisition costs are partly offset in 2012 by positive contributions by SAB’s business restructuring, strategic partnerships, and asset disposal.

AB’s acquisition of Fosters has dented the cash flow and increased debt.

With acquisition costs over, and SAB’s shopping spree out the way, Altria’s investment should soon start to provide a decent return.

Fiscal Year 2013E 2014E 2015E
SAB revenue £13,149 £14,143 £15,112
SAB net profit £2,238 £2,603 £2,948
SAB free cash flow £2,112 £2,339 £2,814
Altria’s share $855 $947 $1,140

Figures in millions.

This table highlights Altria’s predicted 27% of SAB’s net profit over the next three years.

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