Altria Group Inc. (MO)

Present Value of Free Cash Flow to the Firm (FCFF)

Difficulty: Intermediate

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Altria Group Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 5.29%
01 FCFF0 8,679
1 FCFF1 9,729  = 8,679  × (1 + 12.10%) 9,240
2 FCFF2 10,545  = 9,729  × (1 + 8.39%) 9,512
3 FCFF3 11,038  = 10,545  × (1 + 4.67%) 9,456
4 FCFF4 11,143  = 11,038  × (1 + 0.95%) 9,066
5 FCFF5 10,834  = 11,143  × (1 + -2.77%) 8,372
5 Terminal value (TV5) 130,740  = 10,834  × (1 + -2.77%) ÷ (5.29%-2.77%) 101,027
Intrinsic value of Altria Group Inc.’s capital 146,673
Less: Short-term borrowings and long-term debt (fair value) 25,204
Intrinsic value of Altria Group Inc.’s common stock 121,469

Intrinsic value of Altria Group Inc.’s common stock (per share) \$65.02
Current share price \$42.57

Based on: 10-K (filing date: 2019-02-26).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

Altria Group Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 79,525  0.76 6.08%
Short-term borrowings and long-term debt (fair value) 25,204  0.24 2.82% = 4.06% × (1 – 30.58%)

Based on: 10-K (filing date: 2019-02-26).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,868,095,889 × \$42.57 = \$79,524,841,994.73

Short-term borrowings and long-term debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (25.30% + 22.90% + 34.80% + 35.10% + 34.80%) ÷ 5 = 30.58%

WACC = 5.29%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Altria Group Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Interest expense 697  727  754  808  857
Net earnings attributable to Altria 6,963  10,222  14,239  5,241  5,070

Effective income tax rate (EITR)1 25.30% 22.90% 34.80% 35.10% 34.80%

Interest expense, after tax2 521  561  492  524  559
Add: Cash dividends declared 5,660  4,877  4,590  4,261  3,961
Interest expense (after tax) and dividends 6,181  5,438  5,082  4,785  4,520

EBIT(1 – EITR)3 7,484  10,783  14,731  5,765  5,629

Short-term borrowings 12,704  —  —  —  —
Current portion of long-term debt 1,144  864  —  1,000
Long-term debt, excluding current portion 11,898  13,030  13,881  12,915  13,693
Stockholders’ equity attributable to Altria 14,787  15,377  12,770  2,880  3,014
Total capital 40,533  29,271  26,651  15,799  17,707
Financial Ratios
Retention rate (RR)4 0.17 0.50 0.66 0.17 0.20
Return on invested capital (ROIC)5 18.46% 36.84% 55.27% 36.49% 31.79%
Averages
RR 0.34
ROIC 35.77%

FCFF growth rate (g)6 12.10%

Based on: 10-K (filing date: 2019-02-26), 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-27), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-25).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 697 × (1 – 25.30%) = 521

3 EBIT(1 – EITR) = Net earnings attributable to Altria + Interest expense, after tax
= 6,963 + 521 = 7,484

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [7,4846,181] ÷ 7,484 = 0.17

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 7,484 ÷ 40,533 = 18.46%

6 g = RR × ROIC
= 0.34 × 35.77% = 12.10%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (104,729 × 5.29%8,679) ÷ (104,729 + 8,679) = -2.77%

where:
Total capital, fair value0 = current fair value of Altria Group Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Altria Group Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Altria Group Inc.’s capital

FCFF growth rate (g) forecast

Altria Group Inc., H-model

Year Value gt
1 g1 12.10%
2 g2 8.39%
3 g3 4.67%
4 g4 0.95%
5 and thereafter g5 -2.77%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 12.10% + (-2.77%12.10%) × (2 – 1) ÷ (5 – 1) = 8.39%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 12.10% + (-2.77%12.10%) × (3 – 1) ÷ (5 – 1) = 4.67%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 12.10% + (-2.77%12.10%) × (4 – 1) ÷ (5 – 1) = 0.95%