Altria Group (NYSE: MO)
Altria Group, Inc. is an American corporation and a world leader in the production and marketing of tobacco, cigarettes and related products. It was founded in 1822 and is headquartered in Richmond, Virginia. The company provides cigarettes primarily under the Marlboro brand but owns several other brands too. It also has a stake in other products such as the Juul (e-cigarette manufacturer) and Anheuser-Busch InBev (beer). With a new set of regulations from the FDA (U.S. Food and Drug Administration federal agency), Altria has come into the limelight with an increase in hype of 133%, prompting investors to wonder whether they should invest in the company. It currently trades at $43.40 per share.
Positive Hype
With the threat of a recession looming, picking solid stocks has become even more difficult. However, some companies, like Altria have shown strength despite this year’s adversity. Here are a few of the main arguments in favour of the tobacco giant.
Altria Group Inc is a Dividend King and has increased dividends for the last 52 years consecutively allowing investors to currently enjoy a 7.9% dividend yield.
The tobacco stock has a payout ratio of 75% of adjusted earnings per share (below its target of 80%) which helps cover the dividend yield which is indicative of its sustainability.
The company has a solid set of financials with over $21 billion in annual revenue, out of which it turns an impressive 39% ($8.2 billion) of that into free cash flow (also helping sustain dividends). Analysts anticipate the company can achieve 5.5% annual earnings growth over the next five years.
Despite similar growth prospects to its tobacco industry peers, Altria Group's forward price-to-earnings (P/E) ratio of 9.3 is well below the industry average of 13.9.
Its business might merely tread water over the next few years, but its high forward yield of 7.3% helps mitigate the effects of its potential downsides.
Despite slightly unfavourable economic conditions, Altria Group has fared well so far this year having only fallen 6% YTD in comparison to the S&P 500 index's 24% drop YTD. This year, analysts expect Altria's revenue (excluding excise taxes) to dip less than 1% as its adjusted EPS increases 5%.
Low interest rates have resulted in meaningful underperformance for Altria Group in recent years. However, with interest rates set to spike higher in the quarters ahead, investors might be looking to shift away from growth stocks and to value stocks favouring Altria.
Altria also has a 10% stake in Anheuser-Busch InBev which could be used to make a strategic acquisition of reduced-risk product brands, repay debt, or repurchase shares.
Negative Hype
Although Altria shows signs of being very favourable at the moment, it’s not perfect. Here are a few reasons why it might be worth holding off on investing in the company.
Altria bought a 34% stake in Juul in 2018 for $12.8 billion. Unfortunately, FDA recently advocated for the removal of Juuls from store shelves in an attempt to reduce the sale of nicotine products overall. As of the end of the first quarter, Altria has reduced the fair value of its Juul position to just $1.6 billion.
Shares of tobacco giant Altria got smoked recently after an analyst downgraded the stock due to rising gas prices. 60% of cigarette purchases are made at gas stations, so it makes sense for them to go down with gas becoming more expensive. However, this ignores the addictive nature of the product itself, and people have continued to buy cigarettes even though the pandemic was when there was reduced travelling.
Another reason the analyst cited was inflation, which may cause smokers to trade down to cheaper brands and affect their flagship brand Marlboro’s sales and margins. However, Altria also owns several discount brands such as L&M which could help offset the decline. As an industry leader, Altria has also been able to use its robust pricing power for decades to offset declining cigarette volumes with price increases.
Conclusion
Altria's higher yield and lower valuation might initially make it look more appealing in this volatile market, but its long-term growth prospects look a lot murkier. That aside, cigarettes aren’t going anywhere that soon and the company does have a plan to transition to a smoke-free future by 2030. Considering the recent fall in valuation and ever-increasing dividend yields, it is understandable why Altria has gained so much positive hype in recent times and may be worth taking a position in. If you want to learn about more trending stocks, before anyone else, check out our premium plans. Or alternatively, head over to our FAQ page to learn more about the services offered by HypeIndex.
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