Berenberg: Tax Reform Could Spark 21% Higher Earnings For Altria

The tax reform bill backed by Congressional Republicans could be ready for President Donald Trump's signature as early as Tuesday. If it becomes law, tax reform could benefit tobacco companies who pay high taxes like Altria Group Inc MO, according to Berenberg. 

The Analyst

Berenberg's Jonathan Leinster upgraded Altria's stock rating from Hold to Buy with a price target boosted from $72 to $84.

The Thesis

Altria could be a big winner from a corporate tax reduction to the 22 percent level, given the company's tax rate stands at a historical level of 35 to 36 percent, Leinster said in a note. (See the analyst's track record here.) 

While the tax structure is a complicated one for Altria — given its international structure, foreign income dividends and ceilings on the amount of tax deductibility of debt interest — the "major impact" of the tax bill is a reduction in the base tax rate the company will pay, Leinster said. 

Based on a new assumption of a reduction in corporate taxes, Berenberg's EPS assumptions for Altria in 2018-2019 are now 21 percent higher. This is quite notable, since the company returns 100 percent of free cash flow to investors — so shareholders may see an increase in cash returns of more than 20 percent.

Aside from tax reform, the U.S. Food and Drug Administration's vision of new tobacco regulations would "face years of opposition," Leinster said. The ultimate outcome would likely be a compromise on all sides or changes that would take years to enact, he said. 

Price Action

Shares of Altria were up 2.20 percent at $74.25 in early afternoon trading Tuesday.

Related Links:

A Cheat Sheet For 2017 Tax Reform

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