5/8/2015

Altria Group Inc. (MO)

• Altria Group, Inc. was founded in 1919 and is headquartered in Richmond, Virginia. (9,000 employees) Altria Group Inc. (MO) • Manufactures and sells cigarettes, smokeless products, and wine in the United States. Consumer Staples • Largest U.S. tobacco company accounting for 50.6% of total U.S. cigarette sales. • Provides finance leasing services primarily in aircraft, rail and surface transport, electric power, real estate, and manufacturing industries. Applied Portfolio Management • In addition, MO retains almost 27% economic and voting interest in SABMiller, the world’s second-largest brewing company.

Investment Thesis Segments Breakdown • Altria is the largest player in the U.S. tobacco market, with about 50% share. • Marlboro is the dominant cigarette brand in the U.S. with about 42% market share. • Its Copenhagen and Skoal brands combined enjoy roughly 50% share in the steadily growing smokeless tobacco market. • Black & Mild is the second best selling machine-made large cigar in the U.S. • Altria’s annualized dividend payout ratio for 2014 was 80.9%, which was the highest in the S&P Food, Beverage & Tobacco Index. • MO has increased its dividend 48 times in the last 45 years & we expect this trend to continue. • Although we expect domestic cigarette industry volumes to contract over the long term, we see cigarette companies still having the ability to raise prices, and thus margins. • As the largest U.S. cigarette manufacturer, MO should lead this pricing strategy.

1 5/8/2015

Market Share

• In 2013, Nu Mark introduced MarkTen e-vapor products in Indiana and Arizona. During 2014, Nu Mark expanded MarkTen nationally. • In April 2014, Nu Mark acquired the e-vapor business of Green Smoke, Inc. and its affiliates (“Green Smoke”), which has been selling e-vapor products since 2009. • Although MarkTen has been in the marketplace only about a year, it's already available in over 130,000 stores nationwide and continues to evolve its product features. • Nu Mark estimates 2014 total consumer expenditures on e-vapor products of approximately $2 billion based on annualized sales information.

Electronic cigarettes volume sales in the United States from 2009 to 2014 (in millions)

• Ste. Michelle is a leading producer of Washington state wines, primarily Chateau Ste. Michelle, Columbia Crest and 14 Hands • Ste. Michelle holds an 85% ownership interest in Michelle-Antinori, LLC, which owns Stag’s Leap Wine Cellars in Napa Valley. Ste. Michelle also owns Conn Creek in Napa Valley and Erath in Oregon. • For 2014, Ste. Michelle’s reported wine shipment volume increased 4.8% driven by increased volume of 14 Hands and Chateau Ste. Michelle, partially offset by declines in other brands. • Net revenues and operating income increased $34 million (5.6%) and $16 million (13.6%), respectively, due primarily to higher shipment volume.

2 5/8/2015

Wine Consumption in the U.S MO-1 Year Returns

Historical Performance Earnings and Dividends per Share

3 5/8/2015

Profit Margins Dividend Yield

Liquidity & Debt Debt Quality: Baa2 rating by Moody’s

4 5/8/2015

Altman Probability & Piotroski Scorecard Assets, NOPAT & FCF

Profitability: ROA, ROE & ROIC Commitment to Social Responsibility

• Success360° helps organizations better support middle school kids' academic achievement and healthy development through collaboration in and out of the classroom. • Success360° partners include national and local youth-serving organizations such as Communities in Schools, Boys & Girls Clubs, Big Brothers Big Sisters, and 4-H. • In 2014, Altria and its companies provided a combined $21.4 million for the Success360° initiative.

5 5/8/2015

Commitment to Social Responsibility SWOT-Strengths

• Altria and its operating companies' environment • Longevity and stability contributions support organizations that focus on water • Iconic brands quality and conservation, sustainable agriculture, and litter prevention and cleanup. • Customer loyalty • To address water-quality issues, we partner with the National Fish and • Industry leader, large capitalization, and Wildlife Foundation and its Western Water Program. • In addition, Altria partnered with the Alliance for the Chesapeake Bay to largest market share plant trees to reduce the amount of pollutants entering the Chesapeake • Dividend strength Bay watershed and to capture greenhouse gases. • Altria and its companies’ 2014 Environment Contributions totaled $3.4 • Excellent top level management experience million.

SWOT-Weaknesses SWOT-Opportunities • Lack of product segment diversification • High barriers to entry (lower • Increasing debt-to-equity levels competition) • Regional product concentration • Growth in e-cigarettes, wine & liquor • Weather • Macro-economic outlook

6 5/8/2015

New Competition Substitute Products • Barriers to entry are high • Company has large • Existing brand loyalties market share in primary SWOT-Threats are strong substitutes to cigarettes • Distribution lines are • Tobacco is a unique difficult to establish product • Huge capital investment • Government regulation (national, state, outlays required Competitive Rivalry and local) Threat level: Low Threat level: Low Supplier Power Buyer Power Threat level: Medium • Ongoing litigation • Large number of very • Limited choice of similar substitute inputs alternatives • Very low switching costs • Quality of product is • Taxation important to consumer • High brand loyalty • Societal trends • Lower price sensitivity

Threat level: Low Threat level: Medium-Low

Porter’s Five Forces Analysis

Usage Trends Income Statement Forecast

7 5/8/2015

Balance Sheet Forecast Balance Sheet Forecast

WACC Discounted FCF Model

8 5/8/2015

EVA, MVA & Valuation Dividend Discount Model

Relative Valuation Estimated Target vs. Current Price

9 5/8/2015

This is the right stock for the portfolio at this SIF Portfolio Snapshot time because…

• Dominant market share • High dividend yield (4.3%) • High ROIC (96%)

10