Recommended for investors seeking passive income through dividends
New York-listed Altria Group is the holding company of various wholly-owned subsidiaries that manufacture and sell cigarettes, cigars and various tobacco products. Brands such as Phillip Morris USA, John Middleton Co and Helix Innovations operate the main cigarettes, cigar and tobacco business of the company. Altria also has a significant stake in Cronos Group, which is a global cannabinoid company and Juul Labs, which is a manufacturer of e-vapour products. Altria reports two operating segments, which are smokeable products and oral tobacco products. The company currently trades at US$40.25 ($54.08) per share, which is around US$71 billion in market capitalisation.
We believe that Altria is a great dividend play. An undervalued stock does not necessarily mean that only its share price is trading below its intrinsic value. Other forms of investor return could also contribute to a stock’s potential undervaluation, particularly dividends. Altria is one such company that has consistently generated returns to shareholders, mainly through dividend payouts, and also share buybacks. To illustrate an example of this, Altria’s price returns for three, five and 10 years were –8.1%, –20.3% and 13.3% respectively. With dividends reinvested, the returns for the same periods were 16.8%, 18.1% and 107.7% respectively.
For dividend-themed stocks, companies need to be able to generate cash flow to pay out shareholders. Given that Altria’s products are inelastic as they are mainly habit-inducing, the margins should generally be higher. Furthermore, given that Altria sells substances that are highly regulated, industry competitors should be limited and provide the company with a competitive advantage. With a competitive advantage reflected through higher margins, Altria should be able to remain profitable for the products it sells. Chart 1 illustrates this, where Altria’s historical margins have remained relatively high and are growing.
Altria has consistently returned cash to its shareholders through dividends and share buybacks as illustrated in Chart 2. One of the major risks of Altria’s business is health concerns regarding smoking. To address this, the company has taken a clear stance in pursuing a “smoke-free” future by 2030. This is an effort to transition adult smokers away from cigarettes and combustible smokable products and towards smoke-free products such as oral tobacco and e-vapour. In 2018, the share of oral tobacco and e-vapour only made up around 20% of the nicotine space and doubled to 40% just five years later in 2023. There is a clear trend towards smokeless nicotine consumption, which Altria is also moving towards in its business strategy. Smoke-free product R&D is key for innovative smoke-free revenue along with non-nicotine revenue over the longer term, both of which the company is developing. Essentially, to the dividend-based investor, cash flow risk is contained if a company effectively adapts, and Altria is certainly adapting to its changing environment through its smoke-free products such as NJOY and on! PLUS.
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Chart 3 shows the company’s historical dividend yield over the past five years. Altria’s dividend yields have been between 5.2% and 10.5% over this period, with an average yield of 7.7%. The company can sustain lucrative dividend payouts due to its strong cash flow generation ability. Altria has a progressive dividend payment goal, which is mid-single-digit dividend per share growth annually. The company pays quarterly dividends, and the current dividend yield stands at 9.5%, with a forecast dividend yield of 9.7% for the next quarter, annualised. The dividend growth rate for Altria has also been positive, with a one-, three- and five-year dividend growth of 4.4%, 4.1% and 5.1% respectively. The company has historically declared and also targets a dividend payout ratio of 80% of its adjusted diluted earnings per share.
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Altria currently trades at a 28% and 9% discount to its global peers for its forward P/E and EV/Ebitda ratio respectively, indicating that it is an attractive pickup. Although the company’s debt to Ebitda ratio is 2.2 times, most of its interest-bearing debt is long-term, and Altria’s interest coverage ratio of over 10 times indicates that it has a strong capacity to settle its debts through its consistent earnings and cash flow.
Sentiments-wise, the company has seven “buy” calls, seven “hold” calls, and three “sell” calls, with an average target price of over 15% of its current trading price. Based on our in-house valuations, we believe that the intrinsic value of Altria is roughly 20% above its current trading price, including dividends and share buyback returns. So long as dividends are above 7%, Altria is a great company to hold for investors seeking passive income through dividends.
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