How Can Altria’s Valuation Change With A New Effective Tax Rate?

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MO
Altria Group

With the US government’s new tax law coming into effect, many companies will see a significant impact from changes in their effective tax rates. As per the new tax bill, the corporate tax rate will be lowered to 21% from 35%, while the overall tax structure is also expected to be simplified. This factor will improve the valuation of companies, with some companies benefiting more than others. One such company is Altria (NYSE:MO), as the company operates entirely in the United States, and is hence, subject to the exorbitantly high corporate tax rates in the country.

We have a $73 price estimate for Altria, which is slightly higher than the current market price.

Altria Forced To Pay High Tax Rates Currently

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Since splitting with Philip Morris, Altria operates only in the United States. This factor does have some positives: the increased global regulations and the rising strength of the dollar, which have together hit tobacco companies with international operations, have had no impact on Altria’s performance. However, on the other hand, it also means that since all of its revenues are earned in the US, they are taxed at US rates. The company’s effective tax rate has hovered around 35% for the past few years, implying that more than one-third of its profits are going towards its tax payments.

While the statutory rates in the US are quite high, that is typically not the rate most companies end up paying. Deductions and credits can help to reduce the tax liability, and as a result, such companies end up doling out taxes at a lower rate than the statutory rate. As a result, the average tax rate paid by corporates in the US is actually 18.6%, which is, in fact, lower than the rate the Trump government is imposing. According to CSIMarket, on a trailing 12 months basis, the effective tax rate is 20.62%. Hence, the tax rate paid by Altria is in fact much higher than that paid on average by other companies in the United States.

During 2016, the company’s earnings before income taxes were $21.9 billion, and it had to pay taxes of $7.6 billion on it, implying a tax rate of 34.8%. If the tax rate was instead 21%, its tax liability would have been close to $4.6 billion, and its earnings after taxes would rise to $17.3 billion, instead of $14.3 billion. This would mean its earnings would rise by over 21%, and consequently its earnings per share. Looking ahead, we can with certainty say that a fall in the corporate tax rate would have an enormously positive impact on Altria, and, as a result, should give a boost to its stock price.

Altria Set To Benefit Immensely

We have created an interactive model that details how changes in effective tax rates can impact the valuation of Altria. You can modify the assumptions to see how the tax rate/valuation dynamics change.

As per our model, the effective tax rate for 2016 is higher than the reported figures, on account of the merger between SABMiller and AB InBev, which has been adjusted for in the reported figures.

While it is not certain that the company’s reported effective tax rate will fall to 21%, if it does, it can improve the valuation and our price per share by 22%, to $171 billion and $88, respectively.

See Our Complete Analysis For Altria

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions in the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Altria.
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