Altria Exceeds Estimates

Zacks

Altria Group Inc. (NYSE:MO - News) delivered better-than-expected adjusted earnings of 50 cents per share in the fourth quarter of 2011, beating the Zacks Consensus Estimate by a penny. On the other hand, the fiscal year 2011 exceeded the Zacks Consensus Estimate by 2 cents and generated earnings of $2.05 per share.

Both the fourth quarter and the fiscal year 2011 surpassed the prior-year earnings by 13.6% and 7.9%, respectively. The year benefited from strong performance of its businesses, new share repurchase and dividend increases and cost reduction initiatives.

Altria’s adjusted earnings excludes restructuring charges, SABMiller plc’s special items, certain Philip Morris Capital Corporation (:PMCC) leveraged lease charges, certain tax items and charges related to tobacco and health judgments. Therefore, reported EPS decreased 6.8% to 41 cents per share in the fourth quarter and declined 12.3% to $1.64 in the fiscal 2011.

Quarter in Detail

Altria’s total revenue increased 3.4% to $6.1 billion, as opposed to the prior-year period. It also exceeded the Zacks Consensus Estimate of $4.3 billion, owing to higher net revenues from all the reporting segments. However, revenue net of excise taxes increased 5.0% to $4.3 billion in the fourth quarter of 2011.

In fiscal 2011, Altria’s net revenues declined 2.3% to $23.8 billion, owing to lower net revenues from financial services resulting from the second-quarter 2011 charge related to certain PMCC leveraged lease transactions; and lower cigarettes revenues, partially offset by higher net revenues from smokeless products, wine and cigars. However, revenues exceeded the Zacks Consensus Estimate of $16.9 billion. Revenues net of excise taxes also decreased 1.6% to $16.6 billion in 2011.

For the quarter under review, operating income lowered 9.2% year over year to $1.4 billion, while it declined 2.6% to $6.1 billion.

Segment Details

Cigarettes Segment: Net revenue for the Cigarettes segment increased 2.9% year over year to $5.3 billion, primarily due to higher list prices. In fiscal 2011, the cigarettes segment’s net revenues decreased 1.1% to $21.4 billion, primarily due to lower volume, partially offset by higher list prices.

Furthermore, the adjusted operating companies income (“OCI”) in the cigarettes segment surged up 13.7% in the fourth quarter of 2011 to $1.4 billion. Adjusted OCI grew 5.2% to $5.9 billion in fiscal 2011. Reported OCI, on the other hand, declined 5.4% to $1.2 billion in the quarter, owing to higher restructuring charges related to the cost reduction program announced in October 2011 and charges related to tobacco and health judgments in the Bullock and Williams cases, partially offset by higher list prices.

In fiscal 2011, reported OCI for the cigarettes segment increased 2.3% to $5.6 billion, due to higher list prices, partially offset by lower volume, higher restructuring charges related to the cost reduction program announced in October 2011, charges related to tobacco and health judgments in the Bullock, Scott and Williams cases, and higher U.S. Food and Drug Administration (:FDA) user fees.

Smokeless Products: On the basis of the year-ago quarter, net revenue in the Smokeless Products increased 6.6% to $418 million, primarily due to higher volume and pricing. In fiscal 2011, net revenue of the segment grew 4.8% to $1.6 billion.

Furthermore, adjusted OCI grew a robust 3.6% year over year to $232 million. Adjusted OCI grew 7.7% to $896 million in fiscal 2011. Fourth-quarter reported OCI, however, decreased 8.3% to $199 million, primarily due to higher restructuring charges related to the cost reduction program announced in October 2011 and higher promotional costs, partially offset by higher pricing and volume.

In fiscal 2011, reported OCI increased 7.0% to $859 million, primarily due to higher pricing and volume, partially offset by higher restructuring charges related to the cost reduction program announced in October 2011.

Cigars: Net revenue for the Cigars segment jumped 7.3% year over year to $132 million, primarily due to lower promotional spending and higher list prices, partially offset by lower volume. Net revenue in fiscal 2011 climbed 1.3% to $567 million owing to higher list prices.

Furthermore, adjusted OCI grew a robust 95.5% year over year to $43 million. Adjusted OCI on the other hand declined 1.2% to $167 million in fiscal 2011. Fourth-quarter reported OCI, however, jumped 85.7% to $39 million, primarily due to lower promotional spending and higher list prices, partially offset by lower volume and higher restructuring charges related to the cost reduction program announced in October 2011.

In fiscal 2011, reported OCI decreased 2.4% to $163 million, primarily due to costs related to manufacturing infrastructure upgrades and new product costs, partially offset by higher list prices.

Wine: Based on higher premium shipment volume, the Wine segment’s net revenues surged 10.6% to $167 million in the quarter and 12.4% to $516 million in fiscal 2011.

However, the adjusted OCI, excluding integration and UST acquisition-related costs, remained in-line at $37 million in the fourth quarter. It increased 14.5% to $95 million in fiscal 2011. Reported OCI in the fourth quarter of 2011 increased 23.3% to $37 million, primarily due to lower restructuring costs. In fiscal 2011, reported OCI increased 49.2% to $91 million, primarily due to higher premium volume and lower restructuring charges.

Financial Services: Reported and adjusted operating income for the financial services segment in the fourth quarter of 2011 declined 85.7% to $10 million, due to an increase in the allowance for losses related to the American Airlines bankruptcy filing.

In fiscal 2011, the financial services segment reported an operating companies loss of $349 million as compared to the income of $157 million in fiscal 2010, primarily due to the second-quarter 2011 charge of $490 million related to certain leveraged lease transactions and a $25 million net increase in the allowance for losses, partially offset by higher lease revenues, which included gains on asset sales.

In fiscal 2011, adjusted OCI, excluding the PMCC leveraged lease charge, decreased 10.2% to $141 million. The allowance for losses at the end of 2011 was $227 million versus $202 million at the end of 2010.

Cost Savings

During the third quarter of 2011, Altria completed its $1 billion cost reduction program of 2007 to 2011 on exceeding its $1.5 billion goal versus its 2006 cost base.

In October 2011, Altria has initiated a new $1 billion cost reduction program for its tobacco and service company subsidiaries, reflecting Altria's objective to reduce cigarette-related infrastructure ahead of Philip Morris USA Inc.'s (PM USA) cigarette volume declines.

The new program is thus expected to deliver $400 million in annualized cost savings by the end of 2013. Altria estimates total pre-tax restructuring charges in connection with this new program of approximately $300 million, which is lower than the original estimate of $375 million, primarily due to lower-than-expected employee separation costs. Altria recorded 2011 fourth-quarter pre-tax charges of $224 million or 7 cents per share, with the balance to be incurred in 2012.

The estimated charges, substantially all of which will result in cash expenditures, relate primarily to employee separation costs of approximately $220 million, and other associated costs of approximately $80 million including lease termination and asset impairment charges.

As part of Altria’s cost reduction program, on January 1, 2012, John Middleton Co. (Middleton) became a subsidiary of PM USA, reflecting management’s goal to achieve efficiencies in the management of these businesses. Effective January 1, 2012, Altria’s 2012 reportable segments will be smokeable products, which includes cigarettes and cigars; smokeless products; wine; and financial services.

Altria will begin reporting the new smokeable products segment’s financial results and presenting comparable results for prior periods in its 2012 first-quarter results. Altria plans to continue reporting shipment and retail share results for both cigarettes and cigars.

Share Repurchase

In addition, Altria’s board has authorized two $1 billion share repurchase programs in 2011. Altria completed the first $1 billion share repurchase program authorized in January 2011 by repurchasing 37.6 million shares at an average price of $26.62 during the second and third quarters of 2011.

In October 2011, the board authorized the second $1 billion share repurchase program, under which Altria repurchased 11.7 million shares at an average price of $27.84 for a total cost of $327 million during the fourth quarter of 2011. Altria has $673 million remaining in the second program to repurchase shares, and intends to complete it by the end of 2012.

In total, Altria repurchased 49.3 million shares at an average price of $26.91 for a total cost of $1.3 billion during 2011 under these two programs.

Dividend

In August 2011, Altria’s board also demanded an increase in the regular quarterly dividend by 7.9% to 41 cents per common share versus the previous rate of 38 cents per common share.

In December 2011, Altria’s board declared a regular quarterly dividend of 41 cents per share. The current annualized dividend rate is $1.64 per common share. As of January 20, 2012, Altria’s annualized dividend yield was 5.7%.

Altria expects to continue to return a large amount of cash to shareholders in the form of dividends and to maintain a dividend payout ratio target of approximately 80% of its adjusted diluted EPS.

Other Financial Update

At the end of December 31, 2011, cash and cash equivalents were $3.27 billion versus $2.31 billion at the end of December 31, 2010. The company had long term debt of $13.09 billion at the end of December 31, 2011 versus $12.19 billion in December 31, 2010.

Business Outlook

Altria forecasts that the reported earnings will lie in the range of $2.14 to $2.20 per share for fiscal 2012. This includes estimated charges of 3 cents per share related to asset impairment, exit, integration and implementation costs primarily related to the cost reduction program announced in October 2011, and estimated charges related to SABMiller special items.

Therefore, adjusted earnings excluding special items will be in the range of $2.17 to $2.23 per share for fiscal 2012, representing a growth rate of 6% to 9% from an adjusted base of $2.05 per share in 2011.

Headquartered in Richmond, Virginia, Altria engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Altria, which competes with Reynolds American Inc. (NYSE:RAI - News) and Lorillard, Inc. (NYSE:LO - News), currently has a Zacks #4 Rank, which implies a short-term ‘Sell’ rating on the stock. Over the long-term, we hold a Neutral rating on the stock.

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