With the macroeconomic turmoil rattling investors, many have been trying to find comfort in securities offering reduced risk, lower volatility, and more predictable total return prospects ahead.
Among a couple of other sectors, consumer staples come very close to this criteria. With most companies in the sector selling everyday necessities, they enjoy much more predictable sales.
Further, they are likely to outperform during the ongoing inflationary environment, as consumer staples have very strong pricing power. This is due to the demand for everyday necessities being highly inelastic.
Indeed, over the past year, the Consumer Staples Select Sector SPDR Fund ETF (XLP) has lost 1.8%, while the S&P 500 (SPX) has declined by a little under 11%. However, there is one particular company in the consumer staples index that, despite sharing the qualities of its peers, has traded against them. Altria Group (MO), the $82.7 billion consumer staples giant, has seen its shares decline by around 5% year-over-year.
With the company’s revenues sourced primarily from its cigarette business (the wine business was sold), Altria should instead be attracting investors in the current market environment. Cigarettes are among the most inelastic products, meaning that Altria can keep increasing its prices in the current environment with minimal losses from lower sales volumes.
The company has also been boosting its capital returns, which, combined with its currently lower price levels, has formed a very enticing investment case.
That said, Altria faces increased regulatory risks compared to the average company. Further, investors may continue applying pressure to the stock amid its low ESG score and lack of appetite when it comes to allocating capital to a tobacco company. For this reason, I remain neutral on Altria.
Recent Performance
Altria’s Q1-2022 results came in quite resilient once again, despite investors’ concerns. Net revenues came in at $5.9 billion, just 2.4% lower year-over-year. The decline in revenues was primarily due to the sale of the company’s wine business last year. Excluding the wine division, net revenues were virtually unchanged.
To illustrate the point about cigarettes being an inelastic product, net revenues in Altria’s smokable products division increased 0.3% year-over-year, despite cigarette shipment volumes declining 6.3%. This is because the company was able to raise prices by an equally high percentage.
Even though Altria’s top-line performance was satisfactory, the company is better assessed on its underlying profits. Since revenues are unlikely to grow substantially going forward amid a gradually declining smoking population, Altria must remain able to generate strong profits if it is to achieve shareholder value creation.
Indeed, Altria’s adjusted diluted EPS rose 4.7% to $1.12, mainly powered by higher margins (operating income grew 7.2% year-over-year), fewer shares outstanding, and lower interest expenses.
Management reaffirmed its full-year 2022 outlook, expecting Altria’s adjusted diluted EPS to range from $4.79 to $4.93. This implies a growth rate of 4% to 7% compared to last year. Consequently, Altria’s profitability prospects remain in excellent shape. This is absolutely vital for the company to maintain its rich capital returns, which appears to be the only certain positive catalyst left standing for investors.
Capital Returns
According to the midpoint of management’s adjusted EPS outlook and the stock’s current annual dividend per share rate of $3.60, Altria’s payout ratio appears to be below 75%. This suggests a rather comfortable coverage of its substantial 7.8% yield. The company has also paid four consecutive $0.90 quarterly dividends, which means that, most likely, a hike is coming with its next declaration.
This will mark the company’s 53rd consecutive annual dividend increase, which is utterly outstanding. Assuming this year’s increase comes any close to last year’s levels (4.7%), it should be celebrated by the market, considering the already substantial yield. Then again, though, we are talking about Altria, so no one can tell for sure.
As mentioned previously, the boost in adjusted EPS was assisted by a lower share count. Buybacks are a major part of Altria’s total capital returns to shareholders. The company continued to repurchase shares aggressively, allocating over $1.93 billion in that respect over the past twelve months.
In Q1 alone, Altria repurchased $576 million worth of stock, implying an accelerating rate of buybacks. It makes sense, after all, considering the depressed stock price levels. The constant decline in share count should keep contributing to earnings-per-share growth, going forward.
Wall Street’s Take
Turning to Wall Street, Altria Group has a Hold consensus rating based on four Buys, seven Holds, and one Sell assigned in the past three months. At $55.33, the average Altria Group price forecast implies 21.2% upside potential.
Takeaway
Altria’s investment case continues to be polarizing. On the one hand, Altria’s profitability remains rock-solid, management’s guidance is optimistic, and capital returns continue to be aggressive. On the other hand, the company’s area of operations continues to repel investors.
In any case, considering its substantial yield and low valuation (9.4x the midpoint of management’s guidance), the rewards of Altria’s investment case likely outweigh the risks.
