Altria Group (MO) is a consumer staples goliath, boasting a market cap of $82.8 billion. It is known for the Marlboro cigarette brand in the U.S. and several other non-smokable brands, including Skoal, Copenhagen, and the Ste. Michelle brand of wine.
The company also has a 10% equity stake in global beer giant Anheuser Busch Inbev, a significant stake in Juul, the manufacturer and distributor of a vaping product, and a stake in the cannabis company Cronos Group (CRON).
Due to the risks surrounding tobacco stocks, including declining investor interest which can result in a valuation compression and hence affect total returns, I am neutral on the stock. However, I strongly believe Altria can serve investors, especially income-oriented ones, quite well these days. (See Analysts’ Top Stocks on TipRanks)
In my view, Altria makes for a magnificent pick in the current, highly-inflationary environment. Recent news revealed that inflation rose 6.8% in November, the biggest leap in 39 years.
Altra’s products are extremely inelastic, which means that their demand is hardly affected by such economic events as inflation. Altria, therefore, benefits from raising prices in line or even above inflation without suffering a noteworthy decline in sales.
Furthermore, the stock’s massive dividend yield of 8% provides a fantastic margin of safety and adds to the predictability of investor returns in the current uncertain trading environment.
Latest Results
Altria recently reported its Q3 2021 results, with numbers coming robust. Revenues from smokeable products declined by 5.4% year-over-year, driving net revenues 4.7% lower to $6.8 billion.
However, Altria is better assessed by its ability to bring in strong profits. Adjusted diluted earnings per share for the quarter landed at $1.22, 2.5% higher year-over-year.
The company also repurchased 6.7 million shares at an average price of $48.35, for a total cost of $322 million during the period, which helped boost EPS. Altria announced the expansion of its existing $2.0 billion share repurchase program to $3.5 billion.
Management narrowed its full-year diluted EPS guidance to $4.58 to $4.62.
Dividend and Valuation
Altria boasts the title of “Dividend King,” which is an unofficial term that investors apply to companies that have managed to hike their dividend annually for more than 50 consecutive years. Altria counts 52 annual consecutive dividend hikes, with its latest increase being by 4.7% to a quarterly rate of $0.90.
Payouts are also well-covered, with the payout ratio standing at 78.2% at the midpoint of management’s guidance. The dividend is also quite safe considering the company’s accelerated share repurchases. If the dividend was unsafe, management would likely slow down or suspend buybacks. Hence, there is another “layer” of safety here.
The stock P/E ratio at the midpoint of management’s guidance stands at just 9.8, which should be considered a fair multiple in the current environment of expanded valuation. From a forward P/E perspective (next year’s earnings), the multiple stands at 9.3, which is nearly the lowest multiple the stock has traded in 18 years.
Wall Street’s Take
Turning to Wall Street, Altria Group has a Strong Buy consensus rating based on seven Buys and two Holds assigned in the past three months. At $53.11, the average Altria Group price target implies 17.8% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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