Sell Altria Group?

| About: Altria Group, (MO)

Summary

Is the stock overvalued? Perhaps.

But will it matter much in the long-term?

Stock's floor price catches up with increasing annual dividends.

With many income stocks on a tear recently, we profiled two income favorites AT&T (NYSE:T) and Johnson & Johnson (NYSE:JNJ) to extrapolate the future returns for investors buying these stocks at their current levels. When talking about income stocks and ones that have run up recently, it is hard to look past Altria Group (NYSE:MO), which is profiled in this article. Let us get into the details.

Current Situation:

  • Like many stocks, Altria is also trading near its 52-week highs at nearly $64.
  • As a result, the yield right now is well below its 5-year average of 4.70%.
  • How wise is it to buy the stock now?

Income Projection:

Almost everyone owns this stock for its income. Yes, the recent capital gains are good, perhaps great. Even our most recent transaction on this stock is up 12%. But let's not lose sight of the fact that this is an income play. Any gains on top of it must be appreciated and not seen as a reason to sell.

Source: Yahoo Finance

Altria's Dividend Growth Rate (DGR) has been about 8% the last few years as shown in the table above. The remarkable consistency stands out, as the dividend growth rate has always been between 7% and 9%. Given the fact that the company has a stated dividend payout policy of 80% and its consistency, let's assume a dividend growth rate of 7.50% for the next five years. The yield on cost will grow up to 5.30%. This isn't too bad considering the stability this stock brings into a portfolio. Also, keep in mind that a yield level that is built up steadily is much more reliable than a high-flying yield that might not be supported properly by a company's earnings.

Earnings Projection:

Altria reported EPS of $2.79 over the trailing twelve months [TTM], excluding special charges. Analysts are expecting earnings to grow at a remarkable 8%/yr for the next five years. Being the steady player that it is, Altria's quarterly reports almost always match the expectations. Hence, it is reasonably safe to use the expected earnings for our projections here.

The table below shows that buying here at $64 means that the forward multiple is almost always in the mid to low teens. Not a bad deal for a reliable player. Not to get repetitive but price and value are two different things. Enterprise values are best projected over the long-term and not just by looking at the current price. This task gets easier when the company's earnings are relatively stable and easy to project as in the case of Altria.

Capital Gains Projections:

Let us do this two different ways. One using the projected EPS and one using the project annual dividend per share.

  • Altria's current multiple based on regular TTM earnings is 22, which is the market average as well. Given the EPS projections in the table above, Altria's EPS in 5 years should be around $4.43. Giving the stock its average multiple of around 18, we arrive at a share price of $80. That's 25% away from where the stock is right now.
  • Altria's increasing annual dividend also tends to create a floor for the share price between the 4% and 4.50% yield point. Based on the 2021's expected dividend per share of $3.37, the 4% yield mark will be around $84. That's a good 31% away from the current share price. If you average the capital gains over 5 years and add the 3.60% yield, you get a safe 10% return per year.
  • But what makes us so confident?

    • Altria's status as a dividend stalwart. Enough said. When a company announces its dividend policy on its website and has been following through for decades, you know they take their dividends seriously. Investors can certainly look forward to Altria's 47th consecutive dividend increase in September.
    • Altria's continuing business excellence is almost unparalleled. In spite of holding nearly 50% of the market share and being the market leader already, Marlboro continues to show year on year improvements. In addition, Altria's nearly 30% ownership of SABMiller makes it the king of vices.
    • At the end of the day, it's all about the money. Making profits and returning the money to shareholders. Altria's key metrics like profit margin, operating margin, return on equity, and return on assets are generally very high compared to competitors like Reynolds American (NYSE:RAI).
    • Besides everything explained above, it is hard to see this stock sell off even if the market crashes. Yes, when they raid the house, no one is safe. But most income investors still need to be invested somewhere and it's hard to see Altria being abandoned. Will there be a haircut? Sure, there will be. That will be the time to add more. Most of Altria's investors are in it for the increasing income, so where is the need to abandon this stock?

Conclusion:

If a stock reaches a new high, does that make it a sell? If a stock is a little overvalued, does that make it a sell too? We don't believe so, especially if the stock is a stalwart, the multiple isn't obscene, and the reason for buying the stock still holds true. If the (unlikely) reason you bought Altria was to make a few quick bucks, then by all means sell. If not, stay the course and collect the dividends. If you are looking at initiating a new position in Altria, buy a little and average up or down depending on how things go. In a few years, it's hard to see that position being underwater overall as explained above.

At the end of the day, most investors will stay invested at least to keep up with inflation. If you are in fact worried about the market tipping over, what better stock to own than this perennial cash machine.

Disclosure: I am/we are long MO, T, JNJ.

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.