Altria: Pullback And 4% Yield

| About: Altria Group, (MO)

Summary

Upcoming dividend increase will push the yield past 4%.

Well-established dividend policy makes it easy for investors to project future returns.

We are waiting to pounce on a post-earnings pullback, if any.

And by the way, have you heard of digital Altria?

After soaring to a high of $64.16, Altria Group (NYSE:MO) has lost about 6% as it is trading at $60.52. While a 6% pullback might not seem like much considering the run the market has had in the last couple of months, investors must keep in mind that leaders like Altria rarely selloff. The company's commitment to shareholders is legendary as are its brand name and profit making nuance.

Altria reports its quarterly earnings on Thursday, April 28th and we are looking forward to adding more shares if the market presents us with an additional selloff. Being the steady player that it is, Altria rarely misses earnings estimates. The reason for this steadiness is the fact that the company keeps it simple. It sticks to what it knows best. Manufacture and sell an addictive product by spending as little as possible but charge enough for it to make a decent profit. The fact that this addictive product has proved to be very inelastic adds to the lure for investors. All said and done, given the way the market has reacted to recent earnings, we cannot rule out a pullback even for Altria.

Another reason we are looking forward to add to our position is the upcoming dividend increase in August. A 7% dividend increase (close to its recent average) will push the new annual dividend to $2.42 per share. That represents an even 4% yield for investors buying at $60.50. Altria has a famous dividend payout policy of paying 80% of its earnings back to shareholders in the form of dividends. Current expectations are for the company to report $3.04 per share in 2016 and 80% of that is $2.43 per share, which matches with the 7% increase assumed above. Either way you look at it, buying here will almost guarantee a yield of 4% by September of this year.

Altria's earnings prowess and well publicized dividend policy make it very easy to project the future returns, at least on the income front. Try to find out more than a handful of companies that are expected to grow at almost the same rate for the next five years as they did for the previous five years. It's very hard because most industries go through many creative and destructive cycles in that time period. But not this industry. Altria is expected to grow earnings at 8.20%/year over the next five years and this is fairly close to what the company managed in the previous five years. Assuming dividend increases keep pace with the earnings increase, the yield on cost balloons to nearly 6% in just five years. While some don't like using yield on cost, we do. It's not to pat ourselves on the back for a job well done but when buying a position in 2016, what matters to us is what the position will bring over the next few years and not just the current year.

While we mentioned that Altria does what it knows best, the company isn't just sitting idle milking its existing resources. It's also on the lookout for new products to reduce its dependence on smoking products.

  • The 27% stake in SABMiller (OTCPK:SBMRY) has already come in handy and will likely be a bigger part of the pie in the future.
  • MarkTen XL is slowly building its market share in the E-Cigarettes category as Altria has doubled the battery life.
  • Despite being the market leader by a wide margin, Marlboro is still increasing its market share.
  • Additionally, Altria has been silently expanding its digital presence as explained here. This is a classic example of the company's long-term vision. For more than two decades, Altria has been building a database of its customers (over the age of 21) and this database has now resulted in a mobile app that the company uses to distribute coupons that are accepted by retailers. After learning this, we are no longer going to use the term "old-school" with Altria.

Conclusion:

Altria has been a cornerstone in our portfolio and will likely remain so for a long time. Perhaps forever. While we are happy to see the stock going up, we are also looking at using meaningful pullbacks. The 6% pullback is nice already, but the upcoming earnings report could prove to be a good opportunity to add on any weakness. Altria is doing something very rare. Sticking to its core while also adapting itself to the changing demands of the business world.

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.