Shares of Altria (NYSE:MO) hover just above their 52-week low, but Altria stock is starting to look pretty attractive down here. I’m bullish on Altria, given its monster dividend yield of 9.8%, continued commitment to share repurchases, undemanding valuation, and because it may have a few more potential growth drivers in its bag than the market is giving it credit for.
Altria’s Dividend is High but Not in Danger
Simply put, it’s hard to find many dividend stocks that can beat Altria’s dividend yield of 9.8%. This yield is orders of magnitude higher than the S&P 500’s (SPX) average yield of 1.6%, and it also just about doubles the yield of 10-year Treasury notes, meaning that Altria’s dividend is still attractive despite the current high-rate environment.
When a stock features a yield this high, it can sometimes be a warning sign that the dividend is in danger of being cut. But that isn’t the case with Altria. The company’s dividend is sufficiently covered by its earnings.
What’s more, Altria has demonstrated a long-term commitment to paying this dividend and to increasing its payout on a consistent basis over the course of many years. Altria has increased its annual dividend payout for an incredible 53 consecutive years, making it a Dividend King (stocks that have increased their annual dividend payouts for 50 years in a row or more).
Share Repurchases
While Altria’s dividend is compelling, that’s not the only way that the company is demonstrating a commitment to rewarding its shareholders. During the third quarter, Altria bought back 5.9 million shares for approximately $260 million. Share repurchases are another way to return capital to shareholders, as they reduce the number of shares outstanding over time, thus increasing earnings per share.
Through the end of September, Altria has returned $5.7 billion to shareholders through a combination of dividends ($5 billion) and share buybacks ($0.7 billion). Share repurchases can also be seen as a signal that management believes the stock is undervalued.
Cheap Valuation
Speaking of which, Altria also looks cheap from a valuation perspective. The company trades at just 8.1 times consensus 2023 earnings estimates and 7.8 times next year’s earnings estimates. This is a steep discount to the S&P 500, which has an average price-to-earnings multiple of 18.9. It’s also a discount to Altria’s closest peer, Philip Morris (NYSE:PM), which trades for 14.7 times consensus 2023 earnings and 13.7 times next year’s estimated earnings.
Overall, owning stocks with inexpensive valuations can be a defensive move in an uncertain economic environment.
New Products
Clearly, part of the reason that Altria stock trades for such a cheap valuation is that it’s a tobacco stock, a sector that the market isn’t crazy about. Tobacco has long been an industry with declining volumes, so tobacco stocks aren’t going to get the same types of multiples as growth stocks. But tobacco stocks like Altria make up for this with steady earnings power and reliable dividend payments.
It’s no secret that the number of people who smoke cigarettes has been declining over time, but it’s not like Altria is dead in the water. The company did manage to grow adjusted diluted earnings per share by 3.3% for the first nine months of the fiscal year.
Plus, Altria has some interesting irons in the fire when it comes to avenues for future growth.
The company is pleased with the progress of its NJOY Ace e-vapor product and has big plans for it going forward. During the third quarter, it grew its distribution of the product to approximately 42,000 stores, and it plans to expand to 70,000 stores by year-end, representing a massive ramp-up in distribution.
Altria’s leafless nicotine pouch product, on!, is growing fast as well. During the quarter, the overall volume of the oral tobacco industry grew by 5% year-over-year. Shipment volume for on! grew at a scorching 36.7% rate, from 21 million cans to 28.7 million.
Is MO Stock a Buy, According to Analysts?
Turning to Wall Street, MO earns a Hold consensus rating based on three Buys, three Holds, and two Sell ratings assigned in the past three months. The average MO stock price target of $43.60 implies 8.3% upside potential.
Looking Ahead
Altria looks attractive, thanks to its dividend of nearly 10% and its continued share buybacks. The company also has some interesting potential growth drivers in its new products like the NJOY Ace and its on! Oral tobacco products.
If these products continue to grow, they can help Altria offset the decline in traditional smokers. With an inexpensive valuation and shares priced just above their 52-week low, it could be a good time to consider Altria stock and lock in reliable, massive dividend payments bolstered by a steady stream of share repurchases.
