No Merger, But Investors Await More Clarity From Management

On September 25, Altria (MO) announced that merger discussions with Philip Morris (PM) ended with no deal.

The environment for vaping products weakened significantly over the last month due to increased regulatory uncertainty, which likely prevented the two tobacco giants from reaching an agreement.

Philip Morris's stock jumped more than 5% on the news as its shareholders were relieved the company would not expose itself to the more dynamic cigarette and vaping markets in America. However, Altria's stock finished the day slightly lower.

It's hard to say why Altria's stock didn't perform better after some uncertainty was lifted. Some speculators may have bought shares in anticipation of Philip Morris paying a premium for the company and headed for the exits once no deal was reached.

I was somewhat concerned about the terms Altria's management might accept if a deal happened, but I otherwise thought that a merger would be a long-term positive for the firm. Combining forces would improve Altria's regulatory, geographical, and product diversification while also strengthening its balance sheet.

Regardless of the reason, Altria will remain on its own for now as it continues navigating a volatile U.S. business environment for tobacco and smoke-free products.

The good news is that ending merger discussions eliminated the possibility of an effective dividend cut by combining with Philip Morris on unfavorable terms. In its press release, Altria also indicated that the tobacco environment continues performing as expected. 

Specifically, Altria announced it was tightening its guidance for 2019 adjusted EPS growth to 5% to 7% (up from 4% to 7% previously) and reaffirmed its expectations for domestic cigarette industry volumes to decline by 5% to 6%. 

Barring a shift in capital allocation priorities, Altria's fundamentals appear to continue supporting its dividend. 

However, given that Altria was willing to entertain a "merger of equals" with Philip Morris that had potential to result in a moderate dividend cut, investors are right to question if management's capital allocation priorities could change in the future, especially as more focus is put on stabilizing Juul (Altria's Chief Strategy and Growth Officer was appointed as Juul's new CEO yesterday).

In light of the events that have transpired this past month, Altria's Borderline Safe Dividend Safety Score is reaffirmed until we learn more about management's priorities going forward. Altria next reports earnings in late October and will hopefully make its plans for the future clearer then.

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