Last Updated on December 8, 2023 by Prakash Kolli
In today’s post, we will discuss another undervalued company, Altria Group (MO), with a current dividend yield of 8.02% and has been growing its dividends for over 53 consecutive years making the stock a Dividend King.
The market volatility continues because of bank failures and fears of problems spreading to other banks. But investors are also selling the broader market presenting opportunities to intrepid investors. Moreover, it’s not a stock market but a market of stocks. With this kind of mindset, we can still find diamonds in the rough.
There a still a hand full of high-quality stocks that are still consider undervalued in this volatile market. One of those is Altria, the market leader in tobacco products and a well-known dividend growth stock.
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Overview of Altria – A Dividend King
Altria Group, Inc. (MO) is an American corporation and one of the world’s largest producers and marketers of tobacco, cigarettes, and related products. The company’s brands include Marlboro, Copenhagen, Skoal, Black & Mild, IQOS, NJOY, and several others. Altria has the No. 1 cigarette brand in the U.S. Other brands are also market leaders. Notably, the company’s brands are marketed and sold internationally by Phillip Morris International (PM).
Altria also had several large investments including a ~$16.7 billion stake in AB InBeV (BUD), the global beer company. It has an equity investment in JUUL, the U.S. e-vapor leader. However, the company has effectively exited its JUUL investment in exchange for rights to certain JUUL’s heated tobacco products and intellectual property. Also, Altria owns a 45% stake Cronos Group, a Canadian cannabis company. Altria had a warrant to purchase an additional 10% stakes in Cronos but abandoned those at end of 2022.
Total revenue was $20,688 million in 2022.
Since June 2017, Altria Group has been on a downtrend. In June 2017, the Company hit an all-time high, trading for $77.79 per share. Since then, the Company’s stock price has been heading lower while Altria’s dividend yield has been heading higher. When the COVID-19 pandemic hit, the stock price hit a low of $30.95 per share. Since then, the stock price has trended up.
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Dividend Analysis for Altria
We will now examine Altria’s dividend history, its growth, and yield. We will then determine if it’s still a good buy at current prices.
Altria has been growing its dividend for 53 years making the stock a Dividend King. In the last 20 years, Altria has an average dividend growth rate of 8.03%. This kind of dividend growth rate usually beats inflation. Altria’s past 5-year dividend growth average is 7.7%, slightly lower than its ten-year average but not by much.
However, in recent years, the Company has slowed down the dividend increases. The last two years of dividend increases have been 4.55% and 3.53%, respectively. This has a lot to do with the fact that earnings growth has slowed down in recent years. The last quarterly dividend increase was to $0.94 per share in August, 2022.
A slowing growth rate is concerning as a dividend growth investor. We would like to see companies continue to grow its dividend faster than inflation and maintain the rate constant. But still, the rate is higher than many companies.
Something significant to note is that Altria continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industrials were cutting or suspending their dividends payments; Altria continued to pay out its dividend and increased it. That is very impressive. That tells me everything I need to know about the management focus on the dividend policy and dividend safety.
The company has a hefty dividend yield of 8.02% as of this writing. This is an excellent starting yield for those income-driven investors—especially those investors who are leaving the bond market looking for higher yields combined with growth. Income-driven investors may want a 4.0% yield or higher. So, Altria meets that criteria easily and it not common to have the opportunity to buy a Dividend King with such a high yield.
Altria’s current dividend yield is 77 basis points higher than its own 5-year average dividend yield of 7.15%. I like to look at this metric because it gives me a good idea if a company that I am researching is undervalued or overvalued based on the current yield and 5-year average yield. Stock price and yield correlate inversely with one another. If the price goes higher, then the yield goes lower. Vice versa as well.
Is the dividend safe? We should always ask this question if we are looking for an undervalued dividend growth stock to invest in. Sometimes undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.
This is why it is essential to look at the dividend payout based on earnings and free cash flow (FCF). Analysts predict that Altria will earn $5.06 per share for the fiscal year (FY) 2023. Analysts have a 92% accuracy rate in predicting Altria’s futures earnings. Altria is expected to pay out $3.76 per share in dividend for the entire year. Using the dividend payment gives us a payout ratio of 74% based on earnings. Having a 74% dividend coverage with a dividend yield of over 8% gets me very excited. However, the value is over our target of 65%. But Altria has high recurring sales, mitigating risk.
On a FCF basis, Altria has a dividend payout ratio of about 80.4% based on operating cash flow of $8,256 million, capital expenditures of $205 million, and a dividend requirement of $6,599 million. Again, this value is above our threshold of 70%. But Altria generates high cash flow the minimal capital expenditures.
Also, the Company has a solid balance sheet. Currently, Altria has a credit rating of BBB/A3, which is a lower-medium investment grade credit rating. Total debt spiked because of the JUUL investment in 2018. However, leverage ratio has declined from its peak and is now ~1.8X with interest coverage at nearly 11X. Both are reasonably good values. Moreover, Altria has a B+ dividend quality grade, adding to confidence about dividend safety. It would probably be higher except for the debt level.
Future Growth for Altria
This section will look at how well Altria has grown earnings and revenue throughout the years. When evaluating a company, these two metrics are at the top of my list to consider. Without revenue growth, a company can’t have sustainable earnings growth and cannot continue paying out a rising dividend.
For the past ten years, Altria has revenue that has been increasing at a modest Compound Annual Growth Rate (CAGR) of 1.69%. The increase in revenue has to do with price increases on Altria’s products and a few new products. Earnings per share grew at a better rate of 8.15% over the same ten-year period, partly due to leverage and a decline in share count.
Altria’s end markets are in a secular decline and volumes have decline. Cigarette per capita volumes peaked in the mid-1960s when about 40% of the United States population smoked. Total volumes for all tobacco products have been declining rapidly since 2000. Despite these declines, Altria grew its earnings through acquisitions and price increases. The firm acquired John Middleton and UST Inc, entering the cigar and smokeless tobacco markets. In addition, Altria has acquired food and beverage companies, which it eventually exited.
Looking forward, Altria has recently paid $2.75 billion to gain full ownership of NJOY’s e-vapor product portfolio. This gives Altria access to NJOY ACE, currently the only pod-based e-vapor product with market authorizations from the Food and Drug Administration (FDA), a significant advantage. Altria believes the e-vapor market will grow at a single-digit rate.
Altria Group Valuation
One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower P/E ratio based on the past 5-year or 10-year average. Furthermore, I like to use the Gordon Growth Model (GGM). I use a DDM analysis because a business is ultimately equal to the sum of all the future cash flow that that business can provide.
Let’s first look at the P/E ratio. Altria has a P/E ratio of 9.26X based on FY 2023 earnings of $5.06 per share. The P/E multiple very low compared to the past 5-year P/E ratio range of about 9.3X to 11.0X. If Altria were to revert back to a P/E ratio of 10X, we would obtain a price of $50.62 per share.
Now let’s look at the dividend yield. Like I mentioned, the dividend yield currently is 8.02%. Looking at Altria’s trailing 5-year dividend yield average of 7.15 %, there is significant potential upside. For example, if Altria were to return to its dividend yield 5-year average, the price target would be $52.57.
The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 4%. I use a 10% discount rate because of the high current dividend yield. The projected dividend growth rate is lower than its 10-year average but near the 3-year average. This gives us a fair price target of $62.67 per share.
If we average the three fair price targets, we obtain a reasonable, fair price of $55.29 per share. This gives Altria a possible upside of ~128% from the current price of $46.87.
Final Thoughts About Altria
Altria Group is a high-margin business with durable brand competitive advantages. While there’s a long-term secular decline in its cigarette and other tobacco markets, the company continues to generate high free cash flow. The firm has generated outstanding past returns and was a major reason investors like Hayford Peirce successfully became dividend millionaire and created a passive income stream.
That said past returns do not guarantee future returns. But Altria is a Dividend King. With a 8% yield, more than 50 consecutive years of dividend raises, a reasonable payout ratio, and the potential that shares at 18% undervalued, this is an excellent idea for dividend growth investors seeking yield.
Disclosure: Felix is long MO
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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for SeekingAlpha.com as well as SureDividend.com. I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.