Altria Group (MO) Updates on FY16 Outlook; Adds $1B to Stock Buyback Plan (BUD)

October 11, 2016 8:18 AM EDT

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On October 10, 2016, Anheuser-Busch InBev SA/NV (AB InBev) completed its business combination (the Transaction) with SABMiller plc (SABMiller). As previously announced, the combined group will retain the name Anheuser-Busch InBev SA/NV.

In connection with the closing, Altria Group, Inc. (Altria) (NYSE: MO) received 185,115,417 restricted shares of AB InBev, representing a 9.6% economic and voting interest in AB InBev, and approximately $5.3 billion in pre-tax cash, as discussed below. These results reflect the proration effect of elections for the partial share alternative (PSA). Further, Marty Barrington, Altria’s Chairman, CEO and President, and Billy Gifford, Altria’s CFO, have been appointed to AB InBev’s Board of Directors.

“We are very pleased to see the successful completion of this transaction between these two great companies. The transaction allows Altria to continue its participation in the global brewing profit pool as a significant shareholder in AB InBev, and we are excited about the prospects for the long-term value of our investment,” said Marty Barrington.

Cash Proceeds

In addition to the restricted shares, Altria is receiving a total of approximately $5.3 billion in pre-tax cash. The cash results from the terms of the PSA (including proration) and the proceeds from the currency derivatives that Altria entered into to hedge its British pound exposure.

Expanded Share Repurchase Program

Altria’s Board of Directors (Board) has authorized the expansion of the current $1 billion share repurchase program to $3 billion, expected to be completed by the end of the second quarter of 2018. The timing of share repurchases depends upon marketplace conditions and other factors. The program remains subject to the discretion of the Board.

Accounting Gain

As a result of the Transaction, Altria expects to record a total estimated pre-tax gain in its reported earnings of approximately $13.7 billion, or $4.55 per share, substantially all of which will be recorded in the fourth quarter of 2016 (the Gain).

Equity Accounting Treatment and Reporting Lag

Altria will use the equity method of accounting for its investment in AB InBev. As previously disclosed, Altria will report its share of AB InBev’s results using a one-quarter lag because AB InBev’s results will not be available in time to record them in the concurrent period. For example, Altria’s share of AB InBev’s results for the relevant, post-closing portion of the fourth quarter of 2016 will be recorded in Altria’s 2017 first-quarter statement of earnings. Previously, Altria recorded results for its SABMiller investment concurrently with Altria’s reporting calendar.

This timing lag will not affect Altria’s cash flows or quarterly dividends per share, but will impact the year-over-year comparability of reported and adjusted diluted EPS in the short-term and, as discussed below, Altria’s 2016 full-year adjusted diluted EPS guidance.

2016 Full-Year Guidance and Long-Term Financial Goals

To reflect the reporting lag described above, Altria revises its guidance for 2016 full-year adjusted diluted EPS from a range of $3.01 to $3.07 to a range of $2.98 to $3.04, representing a growth rate of 6.5% to 8.5% from a 2015 adjusted diluted EPS base of $2.80, as shown in Schedule 1. This guidance excludes the Gain, the loss on early extinguishment of debt of $0.28 per share resulting from the completion of Altria’s September 2016 debt tender offer, the gain on derivative financial instruments incurred from July 1, 2016 through October 14, 2016 and the 2016 first six months special items shown in Schedule 1.

(*** The Street sees FY16 EPS of $3.05 and revenue of $19.4 billion.)

Altria maintains its long-term financial goals of growing adjusted diluted EPS at an average annual rate of 7% to 9% and maintaining a target dividend payout ratio of approximately 80% of adjusted diluted EPS.

Altria’s full-year adjusted diluted EPS guidance excludes the impact of certain income and expense items that management believes are not part of underlying operations. These items may include, for example, loss on early extinguishment of debt, restructuring charges, the Gain, SABMiller special items, certain tax items, charges associated with tobacco and health litigation items, and settlements of, and determinations made in connection with, certain non-participating manufacturer (NPM) adjustment disputes under the Master Settlement Agreement (such settlements and determinations are referred to collectively as NPM Adjustment Items).

Altria’s management cannot estimate on a forward-looking basis the impact of certain income and expense items, including those items noted in the preceding paragraph, on its reported diluted EPS because these items, which could be significant, are difficult to predict and may be highly variable. As a result, Altria does not provide a corresponding U.S. generally accepted accounting principles (GAAP) measure for, or reconciliation to, its adjusted diluted EPS guidance.

The factors described in the Forward-Looking and Cautionary Statements section of this release represent continuing risks to Altria’s forecast.

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