One of my very first investments as a dividend growth portfolio was Altria (MO). I bought my first shares in the company in 2009, during the financial crisis after the share price fell. The stock was then trading at less than $19. The company was just another battered consumer staples company at the time, when investors thought the world was going to end as we know it.
Over the next 13 years, the company continued to grow and reward its shareholders with increasing dividends. Other stocks moved faster, but Altria was simply a reliable stock with a low beta and great shareholder friendliness. In 2021, we saw growth stocks implode as the risk of rising interest rates became increasingly relevant. As the market environment changes, investors should consider repurchasing the same old value stocks, which tend to be “boring” but offer stable total returns.
In this article, I will analyze the company using my dividend growth stock analysis methodology. The methodology is described in the graph below. I intend to look at fundamentals, valuation, growth opportunities and risks. I will take into account that past fundamentals may not be helpful as the company has gone through significant changes.
Revenues grew very slowly for Altria. The company is currently transforming from a cigarette-only business to a more diversified business. It invests heavily in non-combustible products with additional investments in cannabis and alcohol. During the transformation period, revenue growth is slow as the business tries to move its customers. The analyst consensus, as seen on Seeking Alpha, is that investors should expect mid-single-digit annual revenue growth.
EPS has suffered over the past few years from several investments being delisted during Covid. However, Adjusted EPS continues to grow at a mid- to high-single digit growth rate, fueled by revenue growth, margin expansion due to price increases and the company’s buyout plan. The company is a cash cow, generating more than $4 in cash per share, and that figure has more than doubled in the past five years. According to analyst consensus, as seen on Seeking Alpha, investors should expect mid-single-digit annual EPS growth.
The dividend is the company’s best-known feature. The company has increased the dividend for 52 consecutive years, and the dividend is its priority. The current yield is attractive at 7%, and while the GAAP payout ratio looks scary, the non-GAAP payout ratio and FCF payout ratio are healthy and below the company’s target of 80% of adjusted EPS . Investors should expect dividend growth of 5-6% over the medium term, which is in line with EPS growth.
The number of shares in circulation is also in constant decline. The company is constantly repurchasing shares with one exception during the Covid uncertainty in 2020. The company is currently executing a repurchase plan worth $3.5 billion with $2.5 billion remaining equating to 2% of the company’s market and is expected to be completed by the end of 2022. This will provide further impetus to Altria’s EPS, and I expect another buyback program to be launched around the fourth quarter before the end of it.
We have approximately $2.5 billion remaining under the newly expanded $3.5 billion share buyback program, which we expect to complete by December 31, 2022.
(Billy Gifford, CEO – Q3 Conference Call)
The current P/E ratio is very low in my opinion. Paying 10 times 2022 EPS for the company that pays a 7% dividend and enjoys significant brand awareness is an attractive offer. The transformation of cigarettes into smokeless products is a long one and will continue for the foreseeable future. Still, I believe that with the company continuing to advance other products, the current valuation is not here to stay.
The chart below is from Fastgraphs.com and shows how attractive Altria is at the current valuation. The company is trading 30% below its average valuation of 14. While the lower growth rate during the transformation justifies a lower valuation, the current valuation is very attractive for investors looking for reliable investments. Investors should expect an expansion in the P/E, and while they wait, they have a large margin of safety.
To conclude, Altria is one of the bluest blue chips. Low beta, slow but steady growth, and an incredibly reliable plan to return money to shareholders. The company is transforming its legacy business into a more sustainable business in the 21st century. During this period, growth has slowed and therefore the valuation is very attractive at only 10 times 2022 earnings.
IQOS and activated! are two incombustible products promoted by Altria. IQOS is so far only sold in four states, and the company intends to grow its presence in the foreseeable future by referring cigarette users to its low-risk product. Altria also completed the acquisition of On! which more than tripled its market share in the United States, from 1% to 3%. These two products are the cornerstone of the incombustible segment with JUUL struggling to maintain sales.
The IQOS team continues to refine its go-to-market approach for new and innovative products. In the four states where IQOS is available, total Marlboro HeatSticks volume continued to grow, with repeat purchases accounting for approximately 85% of sales.
(Billy Gifford, CEO – Q3 Conference Call)
Anheuser-Busch InBev (NYSE: BUD) is another opportunity for Altria. The business has suffered from Covid, but continues to be a profitable cash cow. Altria benefits from dividends and expects to benefit from capital appreciation in the future as the business recovers. The company boasts a wide range of well-known alcohol brands, making it a good choice for a long-term investment. In addition, Altria can also sell its stake and use it to repay its debt or return it to shareholders. This is a great opportunity as it gives Altria a very high level of flexibility.
Accordingly, we continue to plan to maintain our investment in ABI. We continue to have confidence in ABI’s long-term strategies, its premium global brands, its experienced management team and its ability to successfully meet near-term challenges. We will continue to regularly monitor and assess market conditions and the aforementioned analytical factors, consistent with our objective of maximizing the long-term value of this investment for our shareholders.
(Sal Mancuso, Executive Vice President and Chief Financial Officer – Q3 conference call)
Chronos (NASDAQ: CRON) is another opportunity. The company is trading at a much lower valuation than in 2019, but the cannabis outlook is still relevant. Altria has the option of acquiring Cronos at a much higher price. However, the company may still be an attractive target to complete the acquisition as it is trading for almost its cash balance. Cronos is a small cannabis company with low inventory and fixed assets. When the market and Altria are ready, it can use its logistics and access to customers to sell these products more widely.
The first risk is transformation. So far, cigarettes still account for nearly 90% of the company’s revenue. Its initiatives in alcohol, non-combustible products and cannabis are still far from being able to replace its historical activity. In addition, the company made several poor capital allocation decisions when acquiring new future businesses. He highlights how difficult this change is from a capital allocation perspective, even when the opportunity is real in the long run.
Regulation is another risk as it limits the legacy activities of the business as well as the future activities of the business. The FDA is cracking down on Altria on cigarettes, as well as JUUL and other vaping products. The switch from cigarettes to other modified risk tobacco products (MRTP) is not facilitated by the regulator who wishes to limit the circulation of all products. Altria has the experience of dealing with the regulator, but this will remain a challenge and a risk in the future in this transformation.
Long-term debt is another risk. For years, the company had balanced its long-term debt around $15 billion. In 2019, the company took on significant debt to fund its acquisitions of JUUL and Cronos. The company’s new level of indebtedness. The higher debt level was not significant until now, but the current business environment is changing and interest rates will rise, and Altria will need to manage this debt more carefully.
The appeal of value stocks has been seen over the past year. 2021 signaled it with the meteoric rise of the Dow Jones, and in 2022 we may see it even more starkly. Technology companies, besides the biggest ones, underperformed as investors bought shares in safer and more reliable stocks. Altria was offering a total return of over 25% in 2021, and as the level of uncertainty is high, investors will be looking for safe havens that have proven themselves in the past, Altria included.
The company is growing while changing. He invests in various businesses that will help him quit smoking. While transforming, it generously rewards shareholders. This is your opportunity to buy stock in a company that in the last 20 years has seen its EPS drop only once, and that was 19 years ago, and benefits from a beta low and an attractive dividend.