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Summary

  • Altria will declare a dividend increase on 8/21/2014 according to their stated targeted dividend goal. Altria Group's target dividend payout ratio is approximately 80 percent of adjusted diluted EPS.
  • I am projecting Altria declares a dividend of $2.06- $2.08/share on 8/21/14. They have declared an increase in August for 16 consecutive years. In my opinion, they will again.
  • Domestic cigarette industry volumes are contracting, however Altria has the ability to raise prices, and thus margins. As the largest U.S. cigarette manufacturer, MO should lead this pricing strategy.

Business Summary:

Altria Group, Inc. (NYSE:MO), is a holding company. At December 31, 2012, Altria Group, Inc.'s direct and indirect wholly-owned subsidiaries included Philip Morris USA Inc. (NYSE:PM) (PM USA), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; John Middleton Co. (Middleton), which is engaged in the manufacture and sale of machine-made cigars and pipe tobacco, and is a wholly owned subsidiary of PM USA; and UST LLC (NYSEARCA:UST), which through its direct and indirect wholly-owned subsidiaries, including U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), is engaged in the manufacture and sale of smokeless products and wine. In April 2014, the company's subsidiary Nu Mark LLC completed the acquisition of e-vapor business of Green Smoke, Inc. and its affiliates.

Altria's 2014 revised estimates from Altria's website:

Altria revised its 2014 full-year adjusted diluted EPS guidance from a range of $2.52 to $2.59 to a range of $2.54 to $2.59, representing a growth rate of 7% to 9% from an adjusted diluted EPS base of $2.38 in 2013.

My Calculation for Altria's next dividend declare date on 8/21/14.

Since their intended target for paying the dividend is a payout ratio of 80% of their adjusted diluted EPS, and their guidance is for $2.54 to $2.59, I will use the average of their guidance, which equals $2.57 rounded. Taking 80% of $2.57 = $2.06 rounded. That would be an increase of 7.3% above their current $1.92 dividend. I think using the average will give us an average dividend increase. I believe that business is good and there is a moderate probability that MO will raise their dividend based on the higher end of guidance to $2.07/share, and a mild to moderate probability they will increase it to $2.08/share. In order for MO to raise its dividend to $2.08/share, MO would have to pay out only a little more than 80% of $2.59/share. A dividend of $2.08/share would represent an 8.3% increase above their current $1.92 dividend.

Why I rate Altria a buy:

1) Altria has boosted distributions over the past decade by 11.40% a year. Currently, the stock is selling at 16.23 times forward earnings and yields 4.6%.

2) MO has exceptional profit margins. As the largest U.S. cigarette manufacturer, MO should lead this pricing strategy.

3) MO has increased its dividend 47 times in the last 45 years. They have an exceptional track record of dividend increases.

4) MO is recession-proof. MO is economically resistant to the outcome of a recession.

5) Not only does MO have an incredible long-term track record, their 5-year total return on a $10k investment 5 years ago is worth $32,109 today (I obtained this figure from S&P Capital IQ).

6) If an investor bought Altria at the current price of $41.78 the yield is 4.6%, however based on my projected dividend raise, MO would yield 4.9%- 5%.

7) MO owns 27% of SABMiller PLC. The value of Altria's stake in SABMiller has been estimated to be in the range of $21B-$25B. Altria receives almost $1B in dividend income from SABMiller. Their stake in SABMiller is a big positive for their bottom line. It also makes MO a diversified tobacco company.

8) MO's high payout ratio is a very good tactic against lawsuits.

9) MO is a large cap company in an industry that is very stable.

10) MO is just getting started in the e-cigarette and vapor business. They currently have a smaller market share versus their competitors, however, based on MO's past history of excellence I believe they will eventually gain in that share of the market, thus increasing their bottom line.

My top 3 market experts:

I have evaluated hundreds of financial experts, market experts and investors over a 22-year period. I have concluded that 98% of them are unreliable. I only trust a handful of them. There are only three experts in the media that I take seriously, and therefore, I highly value their opinion. They are Warren Buffett, Jeremy Siegel and Ken Fisher. It is apparent that Buffett and Siegel have evaluated MO to be an excellent investment.

Wharton Professor Jeremy Siegel has done a tremendous amount of research on dividend stocks:

Siegel searched through the Standard & Poor's 500 Index to find patterns among the winners and losers. "I was frankly shocked that Philip Morris would be the number-one stock," Siegel said. "I would just never have guessed that. I would have said, 'Maybe IBM.'" From 1925 through the end of 2003, tobacco company Philip Morris, now called Altria Group, delivered a 17% average annual return, assuming all dividends were reinvested in the company's shares. That beat the average stock by 7.3 percentage points a year. A $1,000 investment in Philip Morris in 1925 would now be worth more than a quarter of a BILLION dollars.

Dividends matter a lot," Siegel writes. "Reinvesting dividends is the critical factor giving the edge to most winning stocks in the long run."

Warren Buffett's thoughts:
I'll tell you why I like the cigarette business," he explained to Salomon-Chairman John Gutfreund in 1987, according to the book "Barbarians at the Gate." "It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty."

My take on Buffett and tobacco companies:

I believe Buffett has never bought a tobacco company outright because of his concern to protect his reputation. In my opinion, Buffett has found a way to invest in tobacco indirectly by owning Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST). Costco is the number three distributor of cigarettes in the U.S. These investments allow him to have some stake in tobacco without jeopardizing his reputation. Wal-Mart is currently his fifth largest holding. I learned about this during my research for this article. I can't help wonder if he has found another ingenious way to indirectly profit from tobacco that is hidden from the public. I do not have any proof of this, however tobacco seems like an investment Buffett would find very appealing. His statements above about tobacco lead me to believe it fits his criteria for an excellent investment.

My common sense reasons why MO is my core holding and currently comprises 38.3% of my retirement portfolio:

1) Anyone who has walked the streets of a big city or probably a small one can observe the pavement littered with cigarette butts. I see this as a good clue that the business is doing very well.

2) As Buffett stated: "It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty." I believe he would label them as having a moat. I do.

3) Why reinvent the wheel? MO is my core holding because of its unmatched 89-year track record total return performance. Its dividend growth record is also outstanding.

Main Risks:

1) The tobacco industry is beset by litigation. MO is subject to several ongoing legal actions, which could have a material impact on future cash flows.

2) There are potential pressures on trading multiples as investors remain cautious about court trials, and potential increases in excise taxes and smoking bans at the state and local level.

3) Domestic cigarette industry volumes are contracting

Conclusion:

Jeremy Siegel searched through the Standard & Poor's 500 Index to find patterns among the winners and losers. "I was frankly shocked that Philip Morris would be the number-one stock," Siegel said. From 1925 through the end of 2003, tobacco company Philip Morris, now called Altria Group, delivered a 17% average annual return, assuming all dividends were reinvested in the company's shares.

What has been MO's average annual return since 2003?

Remarkably, using the tool provided here, LOW-RISK-INVESTING, it shows MO has delivered a 17.3% average annual return, assuming all dividends were reinvested in the company's shares, from 12/31/03 to 7/27/14.

(By entering Jan 2004 and July 2014 for MO, the appropriate dates will populate. I cannot verify this tool is 100% accurate. I think its accuracy is good.)

I am projecting Altria declares a dividend of $2.06- $2.08/share on 8/21/14. This would represent a 7.3%-8.3% increase of the current $1.92 dividend They have declared an increase in August for 16 consecutive years. In my opinion, they will again.

I currently rate MO a buy. It is NOT a buy for investors who have owned MO for years or decades and have substantial positions established. I rate it a buy for new investors or investors who have only a small position, and who plan on adding shares on a regular basis over the next 10-30 years. Warren Buffett would say after you buy a stock, pray it goes down so you can buy more. I am not adding to my MO position as it currently comprises 38.3% of my retirement portfolio. To sum up: I see MO as a little overvalued currently, however, I think new investors can buy before the dividend raise in order to start a position in the best dividend growth stock over the last 89+ years.

As long as MO continues to increase their dividend and buy back shares, I will hold my MO and reinvest all the dividends received. If they do not increase their dividend in 2014, I will seriously research why and sell if I am not satisfied with what I find. In my opinion, the probability of MO not increasing their dividend in 2014 is extremely low.

To see the rest of my portfolio: My High Dividend Yield Retirement Portfolio Delivers 8.8% Of Income For This Retiree

Here is also my latest article: Why I Love KMR More Than KMP For High Dividend Income

I am anticipating questions concerning why I am not invested in Philip Morris for international exposure. I am working on a Part 2 as a follow up to this one explaining why I choose MO over PM and other parts of MO's business that I did not cover here. Note: I am considering buying some PM since its dividend yield is becoming more attractive.

Source: Altria Is The Best Dividend Growth Stock For Income Investors, I Rate Altria A Buy

Additional disclosure: Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation may not fit each investor's current investing strategy.