An article recently published on SA and later removed took aim at Altria Group (NYSE:MO) and their current share price and valuation, specifically calling the dividend into question. As a current MO shareholder, and a pleased one at that, I would like to clarify some of the points made.
The company known as Altria Group has long been a safe haven for defensive minded investors who affectionately refer to it as "Mighty Mo." When I hear that, I think of the Mighty Mississippi River, growing up in St. Louis and hearing that elicits images of a strong and unstoppable force that man simply cannot control. The same can be said for this company, despite regulations, souring public opinion, and a constant threat to their core product they cannot be controlled by man and they flow despite regulations and bad press.
Right now MO yields an impressive 3.7% and while that may seem high it is actually rather low for the company. This can be blamed on the year's long run up in share price that has outpaced the dividend growth. The dividend remains covered by both EPS and operating income with payout ratios at 81% and 50% respectively. If you look at a chart that is not adjusted for the Philip Morris/Altria spinoff in 2008 it would seem the dividend was slashed violently in 2008. That simply is not the case. Altria has increased the dividend for 46 years and has a place on David Fish's list of Dividend Champions because of that. The apparent drop in the dividend is attributed to the spinoff of Philip Morris in 2008 and Kraft in 2007. These spinoffs created immense value for MO shareholders and is one of the reasons it is so loved by long-time shareholders. The author of the cited article also expresses concern that if MO exercised a stock split, something they haven't done since 1997, it would effectively double the dividend. Fortunately, or maybe unfortunately, for shareholders, that isn't how that works. If MO did a 1:2 split today it would lower the dividend to $1.085 annually but the 3.7% yield would be maintained.
Historical Share Price
If you take a look at a chart that hasn't been adjusted for the Kraft and Philip Morris spinoffs you would think that MO was taken out back to the tool shed and left for dead in 2008 as a result of the recession. Once again, that simply is not the case. In the PM spin-off deal MO shareholders received one PM share for each MO share they held. This directly affected their market value per share for MO which should be expected. During the Kraft spin-off of 2007 for every one share of MO you would have received .692 shares of the newly formed Kraft-Heinz (NASDAQ:KHC), this distribution of shares also affected the market value of MO. The dividend amount in both cases was also adjusted to reflect the change in market value for MO but the yield was maintained. During spin-offs the holding company is releasing value and thusly share price will reflect that. Current owners of MO did not lose anything in this, in hindsight they gained immensely, and therefore there is nothing wrong with MO or their historical share price.
Diversity Is Strength
Altria is a tobacco company that also dabbles in many other businesses. They're incredibly well diversified and this provides security to their shareholders. In 2015 the best performing aspect of their business was their Ste. Michelle wine business which grew net revenues by 7.6% for the full year. Their list of products is extensive: Marlboro, Black and Mild, Copenhagan, Skoal, MarkTen, Green Smoke, Chateau Ste. Michelle, Columbia Crest, 14 Hands, and Stag's Leap Wine Cellars to name a handful. Besides the products they sell they also run Philip Morris Capital Corporation which no longer seeks new investments but manages their current portfolio. Investors may also be interested in the 27% stake MO holds in SABMiller (SAB.L) that comes with voting rights. Altria currently supports the AB InBev (NYSE:BUD) acquisition of SABMiller and expects to receive 10.5% equity in the new company once the acquisition is completed. Along with the transaction they'll also hold two seats on the BOD. Investors need not worry about MO when it comes to being well diversified.
In 2015 MO grew their diluted EPS by 8.9%. For 2016, a time when many companies are forecasting a sideways year at best, MO estimates 7-9% growth in their EPS to $3.00-$3.05. For the full year their net revenue grew by 3.7%, gross profit by 9.4%, operating income by 9.7%, and net earnings by 3.4%. Altria is growing at a time when other companies are lamenting unstable end markets, shrinking margins, and challenging overall conditions. They do not have to compete with the strong dollar as their sales are domestic and they do not have to worry about sudden and violent shifts in regulation as they work closely with the FDA and their industry is already heavily regulated. This forecasted growth and lack of international exposure is one reason the share price has increased rapidly as of late and makes MO look expensive. In times of market uncertainty MO tends to shine, and in times of market certainty MO tends to shine just not as much. My only concern with the current share price is that it could pull-back slightly to around $58-59 a share.
As we can see the company is strong when looking at the dividend, price history, and diversity. Investors need only worry about the share price as it does appear MO has run itself up slightly and will likely pull back in coming weeks if the market stabilizes. With 46 years of dividend increases, constant value being created and returned to shareholders, a stable and steady share price, and incredible diversity inside the company itself it is hard to find a better long-term investment. The company is growing at a time when many aren't, and they anticipate that growth to continue at near double digit rates. Mighty MO will keep right on rolling. I look forward to the discussion in the comments. As always I wish you all the best of luck.
Disclosure: I am/we are long MO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.