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Altria: A Solid Income Stock
Stock Analysis & Ideas

Altria: A Solid Income Stock

Altria (MO) is primarily a tobacco company, but it also sells wines and offers finance leasing. We are neutral on the stock.

Growth Catalysts

Altria mainly operates in the tobacco industry, which is expected to see global expansion at a compound annual growth rate of 1.8% from 2021-28. Although the growth rate is low and the industry is controversial, it demonstrates that the industry is not done growing.

Growth in the industry is being driven by smoking alternatives such as smokeless tobacco. In addition, products such as flavored tobacco are becoming increasingly popular.

However, Altria also operates in the wine and finance leasing industries. The wine industry is growing at a faster rate than the tobacco industry, registering a CAGR of 4.28% between 2021-26. Furthermore, it is not as controversial.

With inflation surging, companies with pricing power are likely to benefit. Altria likely has strong pricing power because people won’t stop smoking simply because of inflation. Thus, it can pass on costs to the consumer. The same thing can be said for alcohol.

Altria Creates Value for Shareholders

While profitability is what determines the viability of a business, not all profitability equates to value creation for shareholders. As a result, we like to use the economic spread to determine if a company is effectively allocating capital to its projects. The formula is as follows:

Economic Spread = Cash Return on Invested Capital – Weighted Average Cost of Capital

The idea is very simple; if the cash return on invested capital is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and would be better off simply investing money into risk-free bonds.

For Altria, the economic spread is a follows:

Economic Spread = 27.6% – 5.8%

Economic Spread = 21.8%

As a result, the company is creating value for its shareholders, implying that management is efficiently allocating capital.

Dividend

Altria currently has a 6.8% dividend yield which is above the sector average of 1.5%. When taking a look at its LTM free cash flow figure of $8.1 billion, its $6.4-billion dividend payment looks safe.

Taking a look at its historical dividend payments, we can see that its yield range has trended upwards in the past several years.

At 6.8%, the company’s dividend is near the upper end of its pre-pandemic range, implying that the stock price is trading at a discount relative to the yields investors have seen in the past.

Valuation

To value Altria, we will use a single-stage dividend discount model because it has a high yield, and we expect it to grow in the low single digits. For the terminal growth rate, we will use the 30-year U.S. Treasury yield as a proxy for expected long-term GDP growth.

Our calculation is as follows:

Fair Value = Dividend per share / (Discount Rate – Terminal Growth)
$76.60 = $3.6 / (0.07 – 0.023)

As a result, we estimate that the fair value of Altria is approximately $76.60 under current market conditions.

Wall Street’s Take

Turning to Wall Street, Altria has a Hold consensus rating, based on one Buy, five Holds, and zero Sells assigned in the past three months. The average Altria price target of $50.33 implies 2.7% downside potential.

Final Thoughts

Altria is an excellent dividend payer for income investors in a market where solid yields have been difficult to come by. If the market continues worrying about inflation, money may continue flowing into defensive companies such as this one.

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