The number of good ideas crossing my desk has dwindled as the market marched higher in recent months. We are once again living in a GAAP world. I'm not referring to "Generally Accepted Accounting Principles", but "Growth At Any Price". Just witness the insanity surrounding Amazon and even Visa.
Aggregate levels of earnings are again irrelevant. It's all about growth rates. It's an old story. Wall Street perpetually overvalues companies with outsized growth (however transient) and undervalues those with low, no, or (God forbid) negative growth.
In addition to some legal issues, this dichotomy was why Altria (MO) separated itself from Philip Morris International (PM). PMI was the "growth" vehicle and Big MO was slow and steady.
Personally, I think the decision to break up the company was silly. In essence, Altria bought into a Wall Street lie. I don't see the value creation, but I do see an opportunity.
True to form, Philip Morris International has garnered most of the attention post spin-off. The story has already been written. MO is in perpetual decline. PMI is where the growth is. Case closed. Or not.
I'm not as anti-PMI as I am pro-MO. It is the better buy. The company closed on its purchase of UST in January. As much as I hate the word, this is a "transformational" transaction. UST is the largest purveyor of smokeless tobacco with brands like Copenhagen and Skoal.
The price was steep: over $10 billion. And Altria paid cash, refusing to issue equity to do the deal. Before the deal, MO had essentially no net debt. Now: around $10 billion. Not a coincidence.
But Altria has one MASSIVE hidden gem. You rarely hear about it in the financial press. And even MO doesn't say much about it. Long-term holders of Altria remember Miller beer very well. It was sold to South African Breweries back in 2002. Nonetheless, Altria still owns a stake in SAB Miller... a BIG one!
Altria owns 430 million shares of SAB Miller. That's 27.37% of the total outstanding shares. The stake has been so overlooked (for so long) by investors that I actually started to wonder if it was a personal illusion.
Thankfully, SAB Miller's helpful investor relations department confirmed the MO stake and its current value of 7 billion pounds.
No need to flip to Bloomberg: 7 billion pounds = $11.5 Billion
To put this equity stake in perspective, it represents 31% of Altria's market value of $37 billion! If sold, Altria could pay off most of its debt and fund sizable share repurchases.
Either way, Altria should consider a sale of the SAB Miller stake. In 2008, Altria earned around 50 cents a share in dividends from SAB Miller or around $225 million. SAB paid a 39 cent interim dividend this year, in line with 2008. If the final dividend is also unchanged, the SAB's current yield will be just 2%. SAB shares are up 53% year-to-date and look fully valued to this analyst. Will Altria sell? I hope so.
Altria also inherited a wine business when it bought UST. This is another distraction that can be readily sold. I don't have enough information to value this business, but the point is that Altria is a goldmine of hidden assets.
I'm calling for a new temperance movement at Altria. It's time to sell out of wine and beer and reallocate the capital elsewhere.
Of course there will be tax consequences, but by any value measure Altria looks a lot better when the full weight of its "liquid" assets are appreciated.
Disclosure: Author owns shares of Altria.