Altria Group (MO) is currently the second-most valuable tobacco company, behind only Phillip Morris International (PM), boasting a market cap of $93.7 billion.
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The industry behemoth is best known for its Marlboro brand, among others such as the Black & Mild brand, and its moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands.
The company also provides oral nicotine pouches, and has invested in other ventures, including holding an equity stake in Cronos Group (CRON), to gain exposure in the rapidly growing cannabis industry. (See MO stock charts on TipRanks)
On the one hand, Altria is highly regarded for the spectacular shareholder value creation it has achieved over the past 100-plus years. On the other hand, the stock attracts mixed feelings from investors nowadays, due to its non-ESG business model (i.e., selling harmful cigarettes).
Despite that, Altria continues to perform well, proven by its recent dividend increase, which extended its consecutive annual DPS hike track record to 52 years. I am bullish on the stock.
Performance And Dividend Prospects
It’s no secret that smoking rates in the U.S. have been consistently on a decline over the past few years. The U.S. (where Altria primarily operates, with Phillip Morris taking over the international share after their split) had more than 61 million smokers a decade ago, while this figure currently stands at around 54 million. It is projected that by 2025, around one million people will have further quitted smoking.
Despite this unfavorable trend, Altria has managed to sustain solid financials due to its ability to utilize higher-priced (tobacco being an inelastic product), and alternative “healthier” products, such as heated tobacco and nicotine pouches.
In its most recent results, Altria posted net revenues of $6.9 billion, an 8.9% year-over-year increase. Impressively, revenues did not only expand in its Oral Tobacco and Wine divisions, which posted growth of 5% and 27.5%, respectively, but also in its Smokable Tobacco segment, where revenues increased by 8%, fundamentally driven by higher pricing and higher shipment volume.
Consequently, adjusted EPS came in at $1.23, 12.8% higher versus Q2 2020. Following a solid quarter, management also hiked its EPS outlook range, expecting $4.56 to $4.62 for the full year.
A month later, following its excellent Q2 results, Altria hiked its quarterly dividend by 4.7% to $0.90, implying an annualized rate of $3.60. Hence, despite the stock’s recent rally, shares still yield an enticing (especially in the current environment of ultra-low rates) yield of 6.8%, which at the midpoint of management’s guidance also suggests a rather comfortable payout ratio of around 79%.
The Valuation
Due to investors, especially institutional ones, avoiding allocating funds into anti-ESG companies these days, as well as Altria’s business model’s questionable longevity (despite its robust performance), the stock’s forward P/E ratio stands at a very attractive 10.5. This implies a significant discount from the mid-teen levels the stock has traded historically.
It could suggest a juicy opportunity, considering that Altria has been aggressively buying back and returning shares in such cases.
Wall Street’s Take
Turning to Wall Street, Altria Group has a Moderate Buy consensus rating, based on five Buys, two Holds, and zero Sells assigned in the past three months. At $53.33, the average MO price target implies 5% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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