Where Is Altria Spending Most Of Its Money?

Altria’s (NYSE: MO) total expenses have trended steadily higher from around $11.5 billion in 2016 to about $18.4 billion in 2018. As a percentage of revenues, expenses have increased from 45% to 73% during the same period. The company’s expenses are largely driven by excise taxes and cost of sales. The two expense heads together account for about 52% of revenues as of 2018, reflecting a drop from 55% in 2016, primarily due to lower smokeable tobacco products sold and higher revenue driven by the company resorting to price increase per unit. This decline from 55% to 52% has added about $858 million to the company’s profits, which translates into additional earnings of $0.46 per share. Excise and cost of sales are further expected to drop to about 50% of revenues in 2020, as volumes decline further and a large part of revenue growth would continue to be driven by price increases. This drop from 52% in 2018 to 50% in 2020, is expected to lead to additional profit of $430 million, translating into additional earnings of $0.24/share. In our dashboard How Does Altria Spend Its Money?, we discuss the trend in all major expense items and what is driving the change.

Total Expenses

Altria’s total expenses have grown from $11.5 billion in 2016 to about $18.4 billion in 2018. For 2019, we expect total expenses to stand at $22.3 billion, which comprises of

• Excise Duty: $5.6 billio
• Cost of Sales: $7.3 billion
• Operating Expenses: $7.4 billion
• Non-Operating Expense (Income): $0.1 billion
• Income Taxes: $2.0 billion

Altria’s Net Income Margins have continuously declined over recent years, from 55.3% in 2016 to 27.5% in 2018, mainly due to 2016 results being unusually high on the back of the gain on SABMiller business combination, while 2017 and 2018 saw a rise in impairment costs along with the absence of large one-time gains. Margins are expected to further decline in 2019, as high impairment cost could more than offset any gains from reduction in excise and cost of sales

Breakdown of Altria’s Total Expenses

Excise

• Excise tax has decreased from $6.4 billion in 2016 to $5.7 billion in 2018 driven by continuous drop in shipments of smokeable tobacco products (cigarettes and cigars).
• It is expected to continue the trend and drop to about $5.5 billion by 2020.
• As a % of Revenues, Excise has steadily decreased from 24.9% in 2016 to 22.6% in 2018 and is expected to drop further to 21.5% by 2020, as revenue growth will be driven by increase in prices even though volume is set to decline.

Cost of Sales

• Cost of Sales have decreased from $7.8 billion in 2016 to $7.4 billion in 2018, driven by a decrease in cigarette and cigar volume sold.
• As most of the revenue growth was driven by increase in price per unit sold, cost of sales as a % of revenue saw a constant decrease from 30.2% in 2016 to 29.1% in 2018.
• The metric is expected to fall to 28.5% by 2020.

Marketing, Administration & Research (MAR)

• Marketing, Administration & Research (MAR) costs having initially decreased in 2017 to $2.3 billion due to lower costs in the smokeable products division, later saw a sharp rise to $2.8 billion in 2018, due to higher costs in the smokeable products segment and the wine segment, acquisition-related costs to effect the investment in JUUL and higher investment spending in the innovative tobacco products businesses.
• As a % of Revenues, MAR cost has remained volatile, with it expected to remain elevated in the near term.

Impairment

• Impairment costs have increased from $0.1 billion in 2016 to $0.4 billion in 2018, driven by Altria’s decision to refocus its innovative product efforts, the cost reduction program, and the impairment of the Columbia Crest trademark.
• Impairment cost is expected to rise sharply to ~$4.6 billion in 2019, driven by reduction in the value of Altria’s share in JUUL ($4.5 billion recognized in first 9 months of 2019).

Non-Operating Expenses

• Altria’s Non-Operating Expense has increased from -$13.1 billion in 2016 to -$0.2 billion in 2018, as the company recognized a gain from SABMiller business combination in 2016 which led to unusually high non-operating income in 2016. Going forward, interest cost would be the primary driver of non-operating expenses.
• To understand how Altria’s non-operating expenses are expected to move in the near term, view our interactive dashboard analysis

Effective Tax Rate

• Altria’s effective tax rate dropped sharply in 2017 as the company recognized one-time tax benefits following the implementation of the TCJ Act.
• The rate increased in 2018 in the absence of tax benefits, but was lower than in 2016 following reduction in the tax rate.
• Going forward, the effective tax rate is likely to remain in line with the statutory tax rate.

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