Altria (MO) Stock Analysis

Altria_logoAltria, headquartered in Richmond, Virginia, is a corporation primarily focused on offering tobacco products.  The company owns several recognizable brands, the most well-known being Marlboro.  Altria reports on three segments- smokable products, smokeless products, and wine.  An investor, desiring to support the company, would shop for Marlboro cigarettes, Nat Sherman premium cigars, Black and Mild cigars in the smokable category.  Customers interested in other Altria products may look for Copenhagen or Skoal in the smokeless category and bottles of Chateau Ste. Michelle if purchasing wine.

Altria recently expanded into the cannabis business and purchased 45% of the voting interest in Cronos, a global cannabinoid company headquartered in Toronto.  Altria purchased 35% of JUUL most commonly identified as a vaping product in 2018.

I developed a watch list to narrow down possible stock purchases for further research prior to making an investment.  I am working to accumulate more shares of my initial stock purchases as I build a strong foundation for my dividend portfolio.  Altria looks to be a promising company in need of a deeper dive.  Let’s take a look at 4 important aspects to consider before buying stock in any enterprise.

Earnings/Revenue

A company cannot grow its dividend payout without generating revenue and profits.  I search for companies demonstrating strong earnings per share history (EPS) and sales revenue exhibiting an increase over the past decade.  Altria made a poor investment choice in purchasing a portion of JUUL forcing it to take a massive impairment charge and report a negative EPS for 2019.  EPS does not always give an accurate picture of how the company performs over a long period of time.  An investor utilizing EPS based on a normalized basis may get a better snapshot of earnings performance. Altria EPS Net income may be influenced in the short term by many different accounting principles- using normalized numbers for a long-term analysis conveys more clarity to an annual or quarterly report.  Altria’s normalized earnings per share confirm a company continuing to increase earnings over the past decade.

Sales Revenue must reflect movement upwards indicating the company exhibits positive increases in sales.  Picture1Altria is still growing top line revenue due to their unique ability to increase the cost of their product to a loyal customer base even when faced with less smokers across the United States.

An investor must do their homework before buying stock- including reading the most recent annual report at a minimum.  Look for how the company is doing in reportable segments- in Altria’s case smokable products, smokeless products, and wine.  Doing so helps gain perspective to growth inside the company.  The chart displays how each segment has performed over the past 5 years.  Altria revenue by segment

Dividend and Yield

I chose to become an investor focused on dividend paying stocks.  Altria is one of the few Altria Dividendcompanies on the Dividend Kings list- a select group of companies that have raised their dividend for 50 consecutive years.  Strong pass on dividend history!  Next check- has the dividend growth been above 6% over the past 5 or 10 years?  Altria surpasses this requirement showing a 5-year combined annual growth rate (CAGR) of 11% and 10-year CAGR of 10%.  The dividend is growing at an aggressive rate proving Altria is indeed dividend royalty.

My goal is to purchase companies that are yielding over 2.5% but I strive to balanceAltria Yield against too high of yield at the same time.  I want the stock to yield less than 7% because many companies with a high yield have it for a reason.  As of the writing of this article, Altria is yielding a whopping 8.9% a definite red alert to the stock.  Altria is yielding at its highest percentage over the past 10 years.  The ability to purchase a stock near its high yield over a past decade can be a solid long-term investment, however a yield this high could indicate issues with how the stock is currently priced.

Price to Earnings Ratio

Altria Historical PEThe price to earnings ratio is possibly the most common way to begin screening out stocks for investment purposes.  The lower the P/E ratio- the more value provided to the buyer of the company.  Taking a look at the current Altria P/E on yahoo finance shows a result of N/A.  The reason is due to using the reported annual EPS instead of the normalized EPS.  Another reason I advocate looking into the normalized EPS.  When substituting the normalized earnings of $3.77- the P/E ratio becomes 10.01, providing a better perspective to the investor.  Altria is trading near its average low P/E over the past decade.

Payout Ratios

Altria Payout RatiosMy last screening criteria before determining if a stock qualifies for further research are the payout ratios.  When putting Altria’s dividend payout up against normalized EPS and Free Cash Flow per share there is not a lot of room for Altria’s payout to grow.  While reading the annual report- the company position is to keep paying up to 80% of EPS towards the dividend.  Armed with this knowledge, I am comfortable with the dividend vs. EPS and FCF ratios.

Future Estimates

Altria possess a 50-year history of raising dividends.  Even with COVID-19 affecting the investment landscape, the company is committed to continuing this tradition.  The Argus analyst report expects dividends to hit $3.74 in 2021.  Altria pulled it 2020 EPS guidance, but analysts predict $4.22 in 2020 and $4.51 in 2021.  The future earnings are able to cover the expected rise in the dividend amount.

Fair Value

I combine two analysts reports, 5-year high yield, dividend discount model and 5-year average low P/E ratio as a guide to pricing a stock.  The combination of these show a fair value price of $53.40 per share.  Altria is trading at $37.73 roughly a 30% discount to my estimated fair value.  The high over the past 52-weeks is $52.46 with the bottom set at $30.95.

Final Thoughts

Altria is considered a wide moat company by Morningstar and Marlboro is a global brand.  In the face of a declining customer base due to less smokers, Altria has been able to generate profits over the last decade.  The JUUL investment has not proven to be wise in the short term, but with attitudes towards marijuana evolving in the US, the Cronos investment shows promise.  Altria is a dividend king, rewarding long term investors with increasing payouts.  I believe Altria is a solid buy at its current price of $37.73.  I am looking to add to my position the first week of June.

Thank you for reading!

7 thoughts on “Altria (MO) Stock Analysis

Add yours

    1. Thank you- I am enjoying your posts on covered calls. Want to learn more about options for future investments.

      Like

  1. I’m thinking of buying some MO but given the recent stock price history I’m worried about long term capital depreciation..

    I do agree that Cronos may prove to be a wise investment in a few years, but the marijuana industry has its own structural problems holding it back (namely taxes and black market competition).

    That said, the dividend growth history mixed with the current yield make it difficult to resist buying shares.

    Like

    1. I really have a lot of respect for MO. I feel like they have a solid moat, top tobacco brands and the ability to raise prices without a massive customer base walking away.

      The dividend has been solid for decades and management is committed to protecting it.

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at WordPress.com.

Up ↑

%d bloggers like this: