Summary
- Altria has dramatically underperformed the market lately due to uncertainty regarding declines in smoking rates and the massive investment in JUUL.
- Cigarette volumes are declining at an accelerating rate, and Altria has a high debt load in the aftermath of purchasing a 35% stake in the e-vapor giant.
- However, JUUL is the dominant leader in a new category that could replace traditional cigarettes. And, JUUL offers a unique international growth opportunity for Altria.
- Moreover, Altria's strong balance sheet is well-equipped to absorb the additional debt.
- Altria is a buy for growth and the 6%+ dividend yield.
By Aristofanis Papadatos
Altria Group (MO) is offering a 6.3% dividend yield, well above its 10-year average yield due to steady dividend growth along with a falling share price in recent months. The stock has dramatically underperformed the market in the last two years. During this period, the stock has shed 34% whereas S&P has rallied 18%.
Income investors have a unique opportunity on their hands, as Altria has rarely yielded above 6% in the years following the Great Recession. With a strong business model and excellent competitive advantages, Altria is one of the highest-quality stocks on our list of 5%+ yielding stocks. You can see our full list of high-yield dividend stocks here.
This extent of underperformance, which is rare for this traditionally resilient, slow-moving stock, has resulted from some headwinds facing the tobacco giant. However, we continue to rate Altria stock a buy due to its future growth potential and 6%+ dividend yield.
Business Overview
Altria has been facing a secular headwind in the last several decades, the decreasing consumption of cigarettes per capita. However, the company has more than offset this headwind via meaningful price hikes year after year. Thanks to the inelastic demand for tobacco products, the benefit from the price hikes has been much greater than the resultant decrease in the demand for these products.
This is clearly reflected in the enviable growth record of Altria. The company has managed to grow its earnings per share in 9 of the last 10 years. Moreover, it has grown its earnings per share at a 9.5% average annual rate in the last decade. This is an enviable growth pace, particularly given the secular decline in the consumption of cigarettes.
While the above mentioned decline in consumption is normal, the market was alarmed in the latest earnings report of Altria, as the company missed the analysts’ consensus in its earnings per share ($0.90 vs. expected $0.93) due to a 14.3% decline in cigarette volumes over last year’s quarter. The market was somewhat justified to be concerned over this accelerated decline, at least on the surface. However, more than half of the decline was caused by inventory overhang from the previous quarter, as well as other non-recurring factors. According to Altria, the adjusted decrease in the cigarette consumption in the first quarter was approximately 5%. Such a decrease is in line with management’s guidance for the upcoming years.
