This morning MO reported fourth quarter adjusted earnings of $1.18 per share, and full year 2022 earnings of $4.84. The full year adjusted earnings were up approximately 5% over 2021.

 

For 2023, MO issued their initial forecast which estimates EPS growth of 3% to 6%, or EPS of $4.98 to $5.13. MO continues to hold to their dividend payout of 80% of earnings, so assuming earnings projections are met, a similar 3-6% increase in the dividend is the most likely scenario in the fall.

 

Overall, there was little change from previous operating trends. By group:

Cigarettes: In the quarter, MO's adjusted shipments of cigarettes dropped by approximately 11%, which was worse than the overall industry drop of 9%, resulting in some additional market share loss. All of the market share loss is due to downtrading, as tobacco customers are increasing pinched by inflation and a weakening economy. MO actually grew it's share in the premium segment of cigarettes, as Marlboro remained strong. However, the deep discount segment continued its growth versus the premium, going to 27.8% of the overall cigarette category, up from 26.1% in last years fourth quarter.

 

Once again, MO was largely able to offset those large volume decreases with double digit price increases on remaining Marlboro smokers, resulting in largely flat revenues (net of excise taxes). And they were able to eek out a 4% operating income gain in cigarettes. When questioned about how sustainable those large price increases are, MO again pointed out that despite double digit increases in the wholesale price of Marlboro, consumers are actually only paying about 6% more at retail, due to the fact that excise taxes have remained fairly stable (no federal increase, some modest state increases).

 

 

Overall, the loss of market share plus the mix shift (from higher margin Copenhagen/Skoal to discounted "on!") resulted in a decrease of revenues and profits of approximately 5% for the quarter in this segment.

 

Other: MO states they continue to hold BUD shares, as they think it is in the best long term interest of shareholders. MO wrote down their carrying value of JUUL to $250 million for $350 million previously. PM also concluded selling off all their remaining assets in PM Capital, so they have now completely exited that leasing business. CRON still largely doing nothing.

 

MO will hold an investor day in March, at which time they will give further detail on their reduced risk product (RRP) strategy going forward.

 

Two interesting questions came up in the earnings call this morning:

1) An analyst asked how MO expects to compete in RRP's given the billions of dollars their competitors are spending (most notably PM) on their R&D while MO is spending very little. MO responded by saying they are repurposing some spending that currently is recorded in cigarette expense, but overall, they think they can compete without major investment damaging shareholder returns by essentially just responding to customer changes as they occur.

2) A second analyst asked that since MO has now given up IQOS, why do they think that IQOS adoption was some much slower than expected when they still held the rights? MO responded that American consumers are more adapted to vaping, and that IQOS faced difficulties as a new product in educating smokers on how to use it, clean it, etc.

 

Listening to those responses, it appears that MO still is skeptical of how fast RRP's will be adopted in the US overall. As I said before, if they are right, then the strategy of milking Marlboro is correct, and PM and others are spending far in excess of possible returns on RRP's. However, I think IQOS (especially ILUMA) is a major threat, and I still believe that PM's projection of it taking at least 10% of the US cigarette market by 2030 is likely. As such, I still think MO's longer outlook remains very cloudy.