Change In Corporate Tax Rate To Positively Impact Altria’s Q1 Earnings

Altria (NYSE:MO) is set to post its first quarter earnings on April 26, wherein a growth in earnings on relatively flat revenues is expected. It is not an unknown fact that the smoking rate has been falling, with the U.S. witnessing one of the steepest declines in the world. In the face of this, a majority of the company’s revenue growth in the past has been a result of increasing the prices of tobacco products, as well as the growth of its smokeless and innovative products segments. These trends are expected to continue in the first quarter, helping in improving the margins as well. Altria is also expected to get a boost to its earnings as a result of the overhaul of the corporate tax code, which reduced the tax rate from 35% to 21%, effective January 1, 2018.

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Bigger Focus On The Small Segments

• The smokeless segment delivered an impressive 11% operating companies income growth in 2017, despite a voluntary recall of some smokeless tobacco products.
• Copenhagen continued its growth and market share improvement. However, Altria’s other big smokeless brand – Skoal – witnessed a market share decline, as the company continued its focus on growing Copenhagen while honing its investments into Skoal to enhance profitability.
• Within e-vapor, Nu-Mark’s Markten brand continued its solid growth, with volumes increasing a mammoth 60%, driven by increased distribution, as well as industry growth.
• The brand ended the year with a national retail share of approximately 12.5% in the mainstream channel.
• Significant progress has been made on the commercialization plans for iQOS, including a consumer engagement program and the development of digital strategies.
• Given the decline in the cigarette smoking rate in the US, it is imperative Altria place a greater focus on its smokeless and innovative tobacco segments. While the smokeable tobacco segment continues to form a large chunk of the company’s revenues, there has been a greater need for diversification. And this is where iQOS can prove to be a game changer.

Tax Rate To Positively Impact 2018 Earnings

• 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 have a massive impact on a company like Altria, as it operates entirely in the United States, and has been, till now, subject to the exorbitantly high corporate tax rates in the country.
• In this respect, the company’s 2018 EPS guidance calls for a 15% to 19% increase on the 2017 figure, implying earnings in the range of $3.90 to $4.03 per share, with the expected tax rate hovering between 23% and 24%.
• Altria will also benefit from a lower tax rate on taxes on AB InBev dividends it receives.
• The EPS will be negatively impacted by the strategic long-term investments Altria has been undertaking, such as innovative product development and launches including iQOS, regulatory science, retail fixtures, and future retail concepts. The company is aiming to reinvest one-third of the total tax reform benefit it is receiving into these initiatives.

Resorting To Share Buybacks

• Another factor that can be expected to boost the earnings for the company is the significant buybacks the company has authorized.
• In 2017, Altria repurchased more than $2.9 billion worth of shares, leaving $18 million in the program as of December 31.
• The company subsequently completed the program in January 2018, and in February, the board authorized a new $1 billion share repurchase program which is expected to be completed by the end of 2018.

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