Altria’s (NYSE:MO) exceptional capital allocation and 9.7%-yielding dividend form a highly compelling investment case with a wide margin of safety. Shares keep hovering at depressed levels despite the overall market recording substantial gains lately as Wall Street continues to overlook Big Tobacco. That said, Altria’s management seems to be pressing the right buttons in its capital allocation game, including repurchasing shares on the cheap. Accordingly, I remain bullish on Altria stock.
FY2023: Another Year of Robust Cash Flows
FY2023 marked another year of robust tobacco cash flows for Altria despite the market continuously bracing for heavy headwinds in Combustibles (traditional cigarettes) revenues.
It’s not that such headwinds were not present, as sales in Combustibles did decline by 3.2%, with higher prices only partially offsetting lower shipment volumes of 9.9%. Nevertheless, cigarette revenues aren’t declining at the catastrophic rates Wall Street seems to be pricing the stock at. In the meantime, the Smokables division does have catalysts for growth, with cigar sales actually rising by 2.8% for the year.
While Combustibles keep chugging along, providing Altria with high-margin cash flows, its non-smokable products posted encouraging results. Oral revenues grew by 3.4% for the year despite the category becoming increasingly competitive In the U.S. market following Philip Morris’ (NYSE:PM) acquisition of Swedish Match. Thus, Altria’s revenues for the year declined by just 2.4% to $24.5 billion.
Superb Capital Allocation Offsets Industry Headwinds
As I mentioned, Altria does face challenges in its Smokeables division. Still, its commendable performance in oral products, coupled with superb capital allocation, not only counterbalanced these headwinds but even propelled earnings growth.
For starters, Altria’s full-year results displayed robust cost control, with its cost of sales declining from $6.4 billion to $6.2 billion. Further, Altria continued repurchasing shares on the cheap, giving a solid boost to EPS, which grew by 2.3% year-over-year on an adjusted basis to a new all-time high of $4.95.
It’s important to highlight the dual advantage that Altria gains from repurchasing shares at their current levels. Not only does this practice significantly contribute to EPS growth, as demonstrated once again this year, but it also presents an additional benefit.
By thinking of Altria’s stock as a “cost of equity” in this context, one could argue that, to some extent, share buybacks by Altria resemble the reduction of a high-cost debt. It’s not a perfect parallel, but this analogy shows that buybacks make for a good “investment” for Altria. I appreciate that management sees the indirect benefit that arises from a depressed share price and actively capitalizes on it to deliver value to shareholders.
Share repurchases should continue to be highly accretive. Note that management forecasts FY2024 adjusted EPS to land between $5.00 and $5.15, suggesting growth from 1% to 4% and a new record despite the continuously bearish sentiment hampering the stock.
The 9.7%-Yielding Dividend Is Rock Solid
Besides its excellent capital allocation, the most attractive component of Altria’s investment case remains its 9.7%-yielding dividend. I believe that the dividend remains rock-solid, as it’s well-covered, and further dividend hikes are expected ahead.
To begin with, the dividend should remain quite safe. At an annual rate of $3.92, the forward payout ratio stands at a healthy 77% at the midpoint of management’s guidance. Additionally, the 9.7% yield serves as a substantial buffer, offering a considerable margin of safety against potential share price declines while ensuring an attractive capital return.
I believe it’s highly unlikely that the market will persist in driving the share price lower at these compelling yield levels. We have also observed this theme in British American Tobacco stock (NYSE:BTI), whose shares similarly bottomed near a 10% yield before modestly rebounding recently.
Finally, Altria’s management has targeted mid-single-digits adjusted EPS and dividend-per-share CAGR through 2028. Such a multi-year outlook of earnings and dividend growth should further reassure the market of the company’s ability to keep delivering robust results in the medium term despite industry headwinds.
Is Altria Stock a Buy, According to Analysts?
Looking at Wall Street’s sentiment on Altria, the stock has a Hold consensus rating based on two Buys, two Holds, and two Sells assigned in the past three months. At $42.68, the average Altria stock price target implies 6% upside potential.
The Takeaway
In my view, Altria’s FY2023 results once again showcased resilience despite the well-known and overly-discussed challenges in the combustibles market. With Smokables delivering decent cash flows despite headwinds in shipment volumes and non-smokable products posting encouraging numbers despite the competition, Altria is far from fading away at the pace the market seems to believe.
In the meantime, the company’s effective capital allocation, marked by strategic share repurchases, offset the modest declines in revenues and contributed to record earnings. The 9.7% yielding dividend, backed by a solid payout ratio, remains a rock-solid component of Altria’s investment case.
Finally, with a promising outlook for FY2024 and a commitment to mid-single-digit CAGR in earnings and dividends, Altria forms a compelling investment case that investors should likely stop dismissing.
