Altria Group, Inc. (NYSE: MO) is a major player in the tobacco industry. With well-known brands like Marlboro and a portfolio of other tobacco products, the company has expanded into other businesses as well, but is now looking for exits and focusing on its core business.
Yet, over the past 5 years, the debt ratio has swelled to a mind-boggling amount. Going into so much debt in a highly regulated environment can pose a risk to any business.
Focus on the core business
Recently, the Altria Group announced a sale of the Ste. Michelle Wine Estates to private equity firm Sycamore Partners for $ 1.2 billion. CEO Billy Gifford noted that this transaction would allow more focus on alternatives to cigarettes for smokers – specifically, smokeless tobacco products.
Next to a US $ 40 million settlement between Juul Labs and North Carolina, this removes only one of the pending lawsuits, as 13 other states have filed lawsuits over marketing practices that allegedly caused an increase in nicotine addiction among young people.
Altria Group has invested $ 12.8 billion in Juul Labs, but this investment has yet to meet its expectations. It’s no surprise that the company took considerable leverage to fund these investments.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could get away with nothing, as debt owners prioritize asset claims.
However, a more common (but still painful) scenario is to raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a great tool for businesses that need capital to invest in growth at high rates of return. When considering the amount of debt a business uses, the first thing to do is look at its cash flow and debt together.
See our latest analysis for Altria Group
What is the net debt of the Altria group?
As you can see below, Altria Group had $ 29.7 billion in debt in March 2021, which is roughly the same as the year before. You can click on the graph for more details. However, given that it has a cash reserve of US $ 5.79 billion, its net debt is less, at around US $ 23.9 billion.
How healthy is the Altria group’s balance sheet?
The latest balance sheet data shows that Altria Group had liabilities of US $ 10.0 billion due within one year, and liabilities of US $ 35.7 billion due after that.
Yet he had US $ 5.79 billion in cash and US $ 142.0 million in receivables due within one year. Its liabilities therefore total $ 39.8 billion more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not that bad since Altria Group has a massive market cap of $ 87.4 billion, so it could likely strengthen its balance sheet by raising capital if needed. In addition, a very high dividend yield of 7.3% could also be put under pressure if debt becomes problematic.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
With a debt / EBITDA ratio of 2.0, Altria Group uses debt smartly but responsibly. And the attractive interest coverage (EBIT of 9.1 times the interest costs) certainly does do not do everything to dispel this impression. The Altria Group increased its EBIT by 3.1% last year. It’s not impressive, but it’s positive when it comes to debt. There is no doubt that we learn the most about debt from the balance sheet. But it is above all future results that will determine the ability of the Altria Group to maintain a healthy balance sheet from now on. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Altria Group has generated strong free cash flow equivalent to 74% of its EBIT, roughly what we expected. This means he can reduce his debt whenever he wants.
Both the ability of the Altria group to convert EBIT into free cash flow and its interest coverage have strengthened us in the treatment of its debt. On the other hand, its level of total liabilities makes us a little less comfortable with its debt. When we consider all the elements mentioned above, it seems to us that the Altria Group is managing its debt fairly well. The company took advantage of low interest rates making its financing cheap and avoiding raising capital by diluting shareholders.
But beware: we believe debt levels are high enough to warrant continued monitoring.
There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 3 warning signs for Altria Group which you should know before investing here.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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