Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States. It offers cigarettes primarily under the Marlboro brand; cigars principally under the Black & Mild brand; and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands. The company also produces and sells varietal and blended table wines, and sparkling wines.
Altria
is a dividend king, which has rewarded shareholders with a raise
for the past 51 years in a row. Altria’s intention is to return a large amount
of cash to shareholders in the form of dividends.
Between
2008 and 2019, Altria managed to boost its earnings per share from $1.45 to $3.90.
The earnings have been adjusted to exclude the one-time charges related to the
investment in JUUL in 2018. The company expects to generate between $4.21/share
and $4.38/share in adjusted earnings per share in 2020.
On
a side note, the earnings per share for 2016 and 2017 and 2019 have been
adjusted to exclude one-time accounting items.
There
are a lot of reasons to like Altria. The products are branded and addictive and
the market for tobacco products so far is in the hands of a few major players
with Altria holding a dominant position. There is some threat of future
legislation banning the sale of tobacco products or making it uneconomical.
However, local governments take in a ton of money by heavily taxing tobacco
products. It is hard to find another scapegoat that can be taxed so heavily.
The
other factor to consider is that while the number of smokers is expected to be
decreasing over time, so far the increase in prices has more than offset the
drop in consumers. At some point, this could reverse, but this has been the
fear for several decades now. So far, price increases have more than offset
volume declines, which results in growing net income year over time. Future
growth in earnings will also be driven by productivity improvements, as well as
strategic acquisitions and new product developments. Share buybacks are another
tool that could increase earnings per share over time. As an owner of a 10%
stake in Anheuser - Busch Inbev (BUD), Altria's fortunes are also tied to the
performance of this entity.
New
regulations could potentially be bad for e-cigarettes, which compete with
Altria’s products. However, there may be regulation against certain types of its
products, which is one reason why tobacco stocks seem to have sold off as of
recently. I am not sure if I would embrace marijuana’s legalization, or
Altria’s deals to acquire stakes in cannabis companies. The cannabis market is
still young, and may disrupt the market for tobacco products. The winners from
legalization may not be known for years down the road however.
I
am not a big fan of the company’s investment in JUUL. You can check the reasons here. While this deal shifts the risk profile, and
increases debt, it could theoretically also increase earnings per share too. It
is very likely that the future dividend growth may be less stellar than in the
past.
The
stock is a very good value today, albeit a risky one, as indicated by the high
current yield. That being said, I am taking an increasingly concentrated bet,
because I have the highest portion of my dividend income coming from Altria. If
I am wrong, and the tobacco business is being disrupted at a faster pace than
anticipated, my portfolio could take a hit in dividend income. If the stock
goes further down, I would be unable to add further to the position from a risk
management perspective. (I have been saying that for two years however)
Growth
in earnings per share is impressive, given the fact that the company has paid
out 80% of earnings to shareholders annually. In addition, the company also
managed to repurchase 10% of shares outstanding during that same time period.
Over
the past decade, Altria has managed to more than double its dividend. The
company paid out $1.22/share in 2008, and it paid out $3.28/share in 2019.
Altria raised its dividend in July 2020 by 2.40% to 86 cents/share.
The
company’s dividend payout ratio has declined from 85% in 2008 to a little over
84% in 2019. Management has stated its target for Altria’s dividend payout
ratio of approximately 80% of its adjusted diluted earnings per share. That
hasn’t stopped it from more than doubling earnings per share over the past
decade.
Currently,
the stock is attractively valued at 10.15 times forward earnings and yields 7.90%.
I believe that the dividend is defensible and can grow over time above the rate
of inflation.