Altria Dividend Stock Analysis
First of all, let’s put health care concerns aside. And, I will ignore socially responsible investing in this article as well.
These topics are important. However, it is hard to argue Altria’s historical place as a quality dividend growth stock.
In contrast, what does the future hold for a company entrenched in a declining product line? It is a key question for me since Altria is one of the largest holdings in my dividend stock portfolio.
So let’s find out. Please join me for an Altria dividend stock analysis. Certainly, I will have some thoughts on the Altria dividend.
Related: How to pick dividend stocks
Altria Company Background
Altria has been a market leader in the U.S. tobacco industry for decades.
Furthermore, their brand names include:
- Philip Morris USA – the maker of Marlboro cigarettes
- U.S. Smokeless Tobacco Company – the maker of Copenhagen and Skoal
- John Middleton – manufacturer of Black & Mild cigars
- Nat Sherman – a premium cigarette and cigar business
- JUUL Labs – 35% ownership in the nations leading e-vapor company
Reduced Risk & Tobacco Product Alternatives
However, Altria’s goal is to be the U.S. leader in authorized, non-combustible, reduced-risk products.
To do this, they have been concentrating on three alternative product platforms:
- Smokeless and other oral nicotine products
- Heat-not-burn tobacco products
Altria is trying to convert traditional smokers to these product lines.
Because they offer reduced health risks and less social friction associated with cigarettes. Even more, they may provide a business model that is more sustainable in the future.
Altria’s product platform is complemented by:
- Ste. Michelle Wine, a collection of distinctive wine estates
- A significant investment in Anheuser-Busch InBev – the world’s largest brewer
- 45% ownership interest in a leading global cannabinoid company – Cronos Group
Because of the significance of these business areas, Altria is no longer a pure-play in the tobacco industry.
Source: About Altria At A Glance
Getting Back Together With Philip Morris?
Finally, Altria is considering a merger of equals with its former partner and international counterpart Philip Morris.
The 2 companies split in 2008 primarily to isolate the international business from tobacco-related litigation risks in the United States.
It is believed that the 2 companies together would benefit from joint efforts to market, sell and distribute reduced risk products worldwide. Rather than trying to go alone.
Okay, not so fast on the merger.
Shortly after Altria and Philip Morris made the public announcement about merger talks, investor pushback emerged. So, a merger is no longer being considered.
Altria Dividend Yield
The Altria dividend payment on a forward basis is $3.36 cents per share. This is an 8.3% Altria dividend yield at the recent Altria stock price.
Altria Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
Multiple Dividend Increases in 2018
In 2018, the Altria dividend was increased twice! 6.1% in March. And another 14.3% in August Certainly, this is some solid, consistent dividend growth.
2019 Dividend Increase
The pace of Altria dividend growth slowed in 2019. Management announced a 5% increase.
I liked management’s statements in the press release announcing the 2019 dividend increase. In it, management touts that 2019 is the 50th consecutive year of annual dividend increases.
And, this latest increase makes Altria a Dividend King. Dividend Kings are those extremely rare companies that have increased their dividends for 50 or more consecutive years.
Also, Altria states in the press release that their dividend payout ratio target is approximately 80% of adjusted diluted earnings per share. Looking at 2019, it appears the payout ratio as Altria defines it will be about 78%.
There are a few things I like from these statements in the press release:
- A company proud of its heritage of consistent dividend growth
- A clear objective for future dividend payments based on financial performance
- A company that delivers on the dividend growth objectives they have set forth
Future Dividend Growth
For my personal planning purposes, I’m going to be conservative and use a 5% dividend growth rate for future years. You will note that this is significantly less than the historical trend.
My belief is Altria will be able to successfully navigate the rapidly changing tobacco industry landscape. Price increases, cost reductions and shifts to new products will offset declines in cigarette consumption in the meantime.
However, excess cash may need to be diverted away from dividend growth to investments in new product initiatives.
These factors will allow Altria to continue growing profits and the dividend but at a reduced growth rate. The future is not without risk, but I like Altria’s chances to make this business transformation.
Related: Coke dividend stock analysis
Altria Revenue Trend
As one might expect, Altria’s revenue has been stagnant for years. It has hovered around $25 billion.
Digging below the top line revenue number, the declining tobacco volume is being offset by higher prices. This is clearly not a sound long term revenue strategy.
But in the short term, exchanging lower volume for higher prices is very beneficial to profit margins. In contrast, meaningful revenue growth in the future will be reliant on the newer, alternative product delivery platforms.
Related: Pepsi dividend stock analysis
Altria Dividend, Earnings & Payout Ratio
Note that in the chart above, I have normalized the 2016 earnings by removing the gain from the Anheuser Busch InBev business combination. In addition, I normalized 2017 earnings for the one-time tax benefits from the tax cut and jobs act.
After taking into account the adjustments noted, over the long-term, Altria earnings have grown consistently. Earnings growth is primarily due to tobacco product price increases and cost reductions.
And the dividend looks adequately covered by those earnings.
Free Cash Flow
Over the past 3 years, dividend payments have consumed 89% of free cash flow. Altria has allocated the remainder of its free cash flow to share repurchases.
Related: Hormel Foods dividend stock analysis
Altria Dividend Safety
Altria’s dividend payout ratios are a little on the high side. However, this is not an uncommon situation for a solidly profitable, but slow-growth business.
A consistently profitable business like Altria’s with minimal capital investment requirements can typically sustain a higher payout ratio. I consider Altria’s dividend very safe for the foreseeable future.
However, dividend growth and safety over the long-term will be dependent on the transition to newer more sustainable products.
In general, a lower dividend payout ratio is a better sign of dividend safety. It shows the company has ample room to raise the dividend in the coming years. Or, withstand an earnings drop without having to reduce the dividend.
Related: Walmart dividend stock analysis
Altria Credit Rating
Knowing a company’s credit rating is important. It can make a big difference between companies that go bankrupt and those who survive during a recession.
A corporation’s credit rating is similar to how your personal credit score works. Higher ratings mean lower risk to those who lend the company money. And, higher ratings mean lenders are more likely to get their loans paid back.
Certainly, we are not lenders here at Dividends Diversify, we are dividend stock investors. However, it never hurts to check out a company’s creditworthiness.
Why? Because high credit ratings also lend support to dividend safety.
Altria has an investment grade, low to moderate credit risk ratings. The ratings are provided by two of the big rating agencies.
Moody’s gives Altria an “A3” rating. And S&P checks in at BBB.
The ratings, as provided by these agencies, are very solid. Most consistent dividend-paying companies hold investment-grade ratings, and Altria is no exception.
Source: FINRA Bond Center.
Altria Stock Valuation
Let’s judge value in several ways:
- Dividend Discount Model
- Morningstar fair value estimate
- Price to earnings ratio
- Personal Finance investment newsletter buy target
Dividend Discount Model
The single-stage dividend discount model considers several factors I have discussed thus far.
- Current annual dividend payment – $3.36 per share
- Projected dividend growth – 5%
- My desired annual return on investment – 9%
Using these assumptions, the dividend discount model calculates the fair value of Altria stock at $88 per share.
Altria Price to Earnings Ratio
The Altria stock price to projected 2019 earnings sits at about 11 times. To compare, the S&P 500 forward price to earnings ratio is nearly 18 times.
Altria stock is trading at a large discount to the market as a whole. This is not an unusual situation for a company with uncertain growth prospects.
At whatever point, the collective mind of stock market traders comes to believe in the growth potential of Altria’s new product platforms, the stock’s value should trade at least in line with the overall market valuation.
Valuing Altria stock at the market valuation of 18 times 2019 earnings gives us a price target of $67 per share.
Morningstar Fair Value
The investment analysis firm Morningstar believes Altria stock is fairly valued at $58 per share.
Personal Finance Investment Newsletter
Finally, the longtime investment newsletter Personal Finance places a buy target on Altria stock at $50 per share.
Source: Personal Finance
Altria Stock Valuation Summary
We have looked at a number of valuation methods that suggest a range of values for Altria stock
Here is a summary:
- Dividend Discount Model – $88 per share
- Price to Forward Earnings Ratio to par with the market – $67 per share
- Morningstar Fair Value – $58 per share
- Personal Finance Newsletter buy target – $50 per share
It is not surprising to me that the Altria dividend discount model produces the highest valuation. It will always favor stocks with a substantial current dividend with positive dividend growth prospects.
Regardless, all of the value measures show that Altria stock is undervalued at recent prices.
Related: Target dividend stock analysis
Altria Dividend Review & Stock Analysis Wrap Up
Altria is a solid company with a long history of dividend payments. Furthermore, the Altria dividend looks safe and well covered for the short term.
In contrast, long term business success is less clear. Because it is dependent on transitioning smokers to newer, unproven, alternative product platforms.
My Personal Situation
Altria is one of the larger positions in my dividend stock portfolio.
Consequently, I do not plan on adding to it at this time. Rather, I will keep a close eye on their business transformation.
For Those Who Do Not Own Altria
If I were building a new dividend stock portfolio or did not hold Altria stock, I would consider adding a small position at current prices. The substantial cash dividend can be used to fund purchases in other dividend stocks.
However, there is risk inherent in Altria’s business situation. So, it is important to hold the stock as part of a diversified portfolio.
And this assumes the investor can tolerate investing in a tobacco company. That, of course, is a personal choice.
From my standpoint, Altria’s current dividend yield projected dividend growth, and status as a Dividend King can not be ignored.
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