All of us who thought the market could not sustain its 2013 run in 2014 have been proven wrong. Mea culpa. However, this is not to say it is time to be reckless and throw money at any stock you can find but to see what could potentially happen if we buy quality stocks at these highs. The experiment starts with the tried and tested Altria Group (NYSE:MO). Let us get into the details.
- Altria is trading at a 52-week high of $43.15 as of this writing, which means the yield is at its lowest recent point at 4.50%.
- The stock is trading at a PE of almost 20, the highest level in the past five years.
- But how wise is it to buy the stock now?
Yield on Cost Extrapolation:
The table below shows the yield on cost for an investor buying Altria at this high-level. The assumed dividend growth rate for the first five years is 8%, which has been Altria's average over the past five years. The next five years assumes just 5%/year. The yield on cost will still double almost.
Let us run through the scenario again: buying at the very top and assuming a less than average dividend growth rate still nets you a yield on cost of almost 8.50% in 10 years. Not a bad deal we should say.
But what makes us so confident?:
You might ask what makes us so confident about Altria increasing dividends further when the payout ratio is already at 88%?
- This stock was the best performing stock over five decades according to Jeremy Siegel's research. Altria did not achieve this through anything fancy but the tried and tested way of making profits, cutting expenses and sharing with shareholders. This is highly likely to continue going forward too.
- Altria will announce a dividend increase in August of this year as well and going by the recent 8% increases, the new annual dividend will be close to $2.10. That should put the yield right back near the 5% mark.
- Earnings are expected to grow at 7.40%/year over the next five years. If that holds true, the EPS will be around $3.10 in five years. Using the current payout ratio of 88% as the metric, we can expect the annual dividend/share to be $2.72/share. That would represent 42% dividend growth from the current $1.92/share. Again, not too shabby.
- Also, based on 2015 EPS estimates, Altria is trading at a PE of 15.63, which is just above the five-year average of 15.16.
- In case anyone did not expect this, the big tobacco companies are expected to dominate the growing e-cigarette segment as well. Reynolds American (NYSE:RAI) has been bidding for Lorillard (NYSE:LO) vehemently and the reason is obviously Lorillard's dominance in the e-cigarette segment.
- All said and done, Altria still has the highest profit margin (25%) among domestic tobacco players. Lorillard's is at 22% while Reynolds' is at 18%. It's all about making profit and sharing those with shareholders. Altria wins on those two counts.
Conclusion: While looking at the current price is definitely not a bad idea, that should not be the only reason that stops you from investing in quality stocks for the long term. What are your thoughts on Altria and any other stock you are looking at for the long term? Please leave your comments below.
Disclosure: The author is long MO, LO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.