tiprankstipranks
Altria Stock: Secure Dividend, but Too Many Headwinds
Stock Analysis & Ideas

Altria Stock: Secure Dividend, but Too Many Headwinds

The growth trade is finally fading in favor of boring growth names. Shares of tobacco giant Altria (MO), with its massive 7.2% dividend yield, seem like an old-school play to check out as investors begin to buy boring value names lacking in real growth prospects.

Despite the elevated payout ratio, Altria’s dividend still looks well-supported, given it really doesn’t need to invest considerable sums of capital like most other firms. Still, just because the dividend seems secure (for now) does not mean Altria’s seemingly undervalued shares are a buy. The stock has been on a rough multi-year decline since the summer of 2017. I am bearish on Altria stock. 

Undoubtedly, cigarettes look to be amid a secular decline, as consumers aim to quit smoking to improve their health or explore alternatives such as vaping in an effort to quit smoking.

Further, vaping has greater appeal to the younger generation. While Altria can continue to be a force to be reckoned with in the vaping world, intense competition in vaping could further erode Altria’s moat. Cannabis vaping, in particular, could have the potential to surge in popularity.

Secular Headwinds Appear Considerable

Indeed, sights could be set on the U.S. following Canada’s lead for cannabis legalization. This scenario could weigh on demand for Altria’s tobacco-based products, although cannabis and tobacco may not exactly be direct substitutes.

Bank of America Securities recently remarked on the 40% growth surge in U.S. cannabis sales. In my opinion, the surge in cannabis use is just another growing trend that could apply further pressure to big tobacco firms.

There Are Potential Nearer-Term Headwinds, Too

For now, Altria’s operating cash flows are solid. Its low capital costs are intriguing for dividend seekers, and the valuations seem easy to get behind. Still, there are ethical considerations to account for with big tobacco firms and other risks that could weigh on the share price.

It’s not just based on investors’ willingness to buy “sin stocks,” rather, ESG factors may act as some sort of overhang for firms like Altria.

Though the company may get top grades for the “E” in ESG, with a “Double-A” rating in the climate and water protection categories, the “S” (social responsibility) part of “ESG” should not be overlooked. ESG is growing increasingly important, and firms that negatively impact society are likely to see their shares punished accordingly. A solid environmental rating is promising, but the “S” part of ESG seems impossible to fix.

The dividend is enticing, as does the valuation (3.4 times sales), but it’s tough to get behind a company with a long-term trend that’s pointed lower. Also, there are, of course, ethical considerations and regulatory risks to ponder.

Moreover, the Biden administration could hike taxes on tobacco products, and other government regulatory moves could have a further material negative impact on MO stock.

Wall Street’s Take

Turning to Wall Street, MO stock comes in as a Moderate Buy. Out of eight analyst ratings, there are five Buy recommendations and three Hold recommendations.

As for price targets, the average Altria price target is $51.88, implying 2.6% upside potential. Analyst price targets range from a low of $47 per share to a high of $56 per share.

The Bottom Line on Altria Stock

It will be hard to put a stop to the secular decline in the tobacco industry, given the potential for near- and long-term headwinds.

Recently, Bank of America downgraded Altria Group, slashing its price target to $50 from $56 and changing its rating to Hold from Buy.

Could more such downgrades be in the cards? I wouldn’t doubt it. The dividend may not be at risk, but that doesn’t mean the stock isn’t free from excessive downside risks, given potential negative catalysts.

Download the TipRanks mobile app now

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles