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Altria Group: Good Quarter, Strong Capital Returns
Stock Analysis & Ideas

Altria Group: Good Quarter, Strong Capital Returns

Altria Group (MO) is a consumer staples colossus boasting a market cap of $93.5 billion. Altria is mostly known for the Marlboro cigarette brand in the U.S. and some other non-smokable brands, including Skoal, Copenhagen, and the Ste. Michelle brand of wine. 

Further, the company holds a 10% equity stake in global beer giant Anheuser Busch Inbev (BUD), a substantial stake in Juul, the manufacturer and seller of a vaping product, and an equity investment in the cannabis company Cronos Group (CRON). 

On the one hand, investor interest in tobacco stocks remains depressed due to elevated risk and ethical concerns. On the other, the company’s robust cash flows, strong capital returns, and attractive valuation comprise an enticing investment case. Regardless, I am neutral on the stock.

Latest Results and Dividend

Altria’s Q4 results came in rather solid, with revenues growing 0.61% to $5.09 billion. Growth was driven by the company’s U.S. Oral Tobacco segment, as its market share for on! nicotine pouches grew to 3.9% in Q4, an increase of 0.9% sequentially or 2.8% compared to the prior-year period.

It was also surprising to see that net revenues in Altria’s smokeable products grew 0.4%. This was primarily driven by higher pricing, despite lower shipment volumes and the ongoing concerns regarding a declining smoking population.

While the top-line performance was satisfactory, Altria is one of those companies that are better assessed on its underlying profits. With its revenues unlikely to grow substantially going forward, strong profitability is critical for Altria’s ability to deliver shareholder value creation.

For the quarter, adjusted EPS grew 10.1% to $1.09, mainly driven by higher adjusted operating income, favorable net periodic benefit income, and a lower amount of outstanding shares. Consequently, adjusted EPS for the year also grew by 5.7% to $4.61.

Management expects full-year 2022 adjusted diluted EPS to be in a range of $4.79 to $4.93, implying a growth rate of 4% to 7% compared to 2021. Hence, Altria’s profitability prospects remain in great shape, which is quite essential for the company to sustain its hefty capital returns.

Based on the midpoint of management’s guidance and Altria’s current annual dividend per share rate of $3.60, the payout ratio should be below 75%, which implies a relatively comfortable coverage of the stock’s current 6.8% yield.

The company also took advantage of its solid bottom line to repurchase 35.7 million shares at an average price of $46.97 in 2021, for a total cost of $1.7 billion. The consistently declining share count should further contribute to EPS growth going forward.

Valuation

In my view, besides the company’s resilient cash flows and growing capital returns, Altria’s investment case is quite alluring due to the stock’s inexpensive valuation.

Its forward P/E ratio stands at just about 10.6 based on its current price and the midpoint of management’s EPS guidance.

Hence, the stock offers investors a higher comparative margin of safety in the current environment where stocks with pricey valuation multiples get hammered.

Wall Street’s Take

Turning to Wall Street, Altria Group has a Hold consensus rating based on one Buy and five Holds assigned in the past three months. At $50.33, the average Altria Group price target implies 1.9% downside potential, with Wall Streets analysts apparently sharing a different view.

Conclusion 

I am neutral on Altria, but only because the stock’s future total returns are likely to be sourced mostly from its dividend payments. That said, I continue to believe that Altria is a top dividend stock that can adequately serve income-oriented investors generously through 2022 due to its high, well-covered dividend and aggressive stock buybacks.

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