Altria Group Extinguished Roughly 67% of Its Unsecured Loan

GuruFocus.com

- By Alberto Abaterusso

With reference to the previously announced cash tender offer for any and all of its senior unsecured 9.95% notes due 2038 and any and all of its senior unsecured 10.2% notes due 2039, Altria Group (MO) settled an early extinguishment of approximately 445 million of its senior unsecured 9.95% notes due 2038 and approximately 425 million of its senior unsecured 10.2% notes due 2039.


The following table shows information about the tender offer announced Sep. 13:

Source: Altria's Group PR

Altria paid a total consideration of $1,842.71 per $1,000 principal amount of each of the 2038 notes accepted for purchase and $1,884.63 per $1,000 principal amount of each of the 2039 notes accepted for purchase.

As a consequence of this early extinguishment of its debt, the company expects to record a one-time, pre-tax charge of approximately 28 cents per share against reported earnings in the third quarter 2016.

The company is going to fund the early extinguishment of its debt of approximately 67% with a new senior unsecured notes issue.

This is good news for the shareholders of Altria because through these transactions the tobacco company will reduce the interest expense and extend the average maturity of its debt. This will have a positive impact on the economics of the company with a well-diversified portfolio.

But the core business is the sale of smokeable products despite the effort to enhance the public's awareness of the harmful effects of smoking. So far the company has been able to increase its dividend to its shareholders 47 times in 50 years, meaning that Altria Group, the owner of Marlboro - the world's best-selling cigarette brand - continues to profit and sales are steadily growing.

On Aug. 25, the tobacco giant increased its regular quarterly dividend by 8.0% to 61 cents per common share versus the previous rate of 56.5 cents per common share. The new annualized dividend rate is $2.44 per common share, representing a yield of 3.82% based on Altria's closing stock price of $63.87 on Sept. 24.

On Sep. 20, Altria Group reaffirmed its 2016 EPS guidance of $3.01 to $3.07. The guidance doesn't include the loss related to the early extinguishment of debt and doesn't take into account the Anheuser-Busch InBev-SABMiller combination because the deal is not closed yet.

The impact of lowering the financial cost of the loan principal of Altria on the Weighted Average Cost Of Capital (WACC):

A lower cost of debt will produce a lower cost of capital. If you use the cost of capital as the discount rate in a discounted dividend model to calculate the present value of Altria Group, you will obtain a higher terminal value because the difference between the discount rate and growth rate will be smaller. This means that the stock may still look a good buy at the current price.

Analysts' recommendation is 2.2. The recommendation ranges between 1 (Strong buy) and 5 (Sell). The average price target of Altria Group is $69.20; last Friday the stock closed at $63.87 per share on the NYSE.

Disclosure: I have no position in Altria Group.

This article first appeared on GuruFocus.