Altria: Still Undervalued

| About: Altria Group, (MO)

Summary

Analyzing the company's financials.

Projecting the company's dividend growth.

Discussing possible regulatory and litigation risks.

Finding conservative investments that offer strong cash flow has never been more important in today's market. With the market essentially flat over the last six months and fixed income offering minimal income, investors are increasingly willing to pay a premium for strong income investments.

Altria (NYSE:MO) has been one of the best growth and income investments for some time, with the stock price tripling since the financial collapse of 2008.

(cnbc.com)

The U.S.'s leading tobacco company has also raised the company's dividend at a high single-digit rate for decades.

The hardest investment analysis in a slow growth economy with rates likely to remain low for an extended period of time is value analysis. Every sector is different, and valuing companies in each sector often requires using a different metric.

The best way to value tobacco companies is to use cash flow. Altria's management projects a mid-to-high single-digit growth rate over the next five years. If the company can continue to raise the dividend at 6-8%, the largest tobacco company in the U.S. will offer far better cash returns than most fixed investments.

Altria has raised the company's dividend by an average of 8.5% over the last 2 years, increased the dividend by nearly 50% since 2011, and doubled the dividend since 2008.

52-Week Projected Earnings Per Share 2.77
52-Week Projected Dividends Per Share 2.26
Dividend Cover 1.23 : 1
52-Week Projected Yield 3.37%
52-Week Trailing Yield 2.86%
6-Year Average Yield 3.87%
6-Year Dividend Change 43.04%
6-Year Yearly Dividend Change 7.17%
Number of Dividend Payments (1991-03-08 - 2016-03-11) 97
Click to enlarge

(dividendinformation.com)

Altria's stock currently trades at $68 a share and yields 3.37%. The company's payout ratio is 74% and analysts are projecting an 8% growth rate over the next five years. The company has grown at around 8% over the last five years. Altria's three major sources of growth are rising prices, growth in the company's position in Budweiser (NYSE:BUD), and declining litigation costs.

The best way to value Altria in a slow growth and low interest rate environment is to project the company's likely cash cow and dividend growth over the next couple years and compare the stock to an average fixed income investment. The primary appeal of Altria and other dividend stocks is income.

The 10-year Treasury currently yields 1.45% and the 2-year treasury yields .61%. Many corporate bonds with near-term maturities yield less than 2 years yield of less than 2%.

Even though stocks such as Altria are obviously higher risk than many fixed income investments, Altria should be able to raise the dividend by nearly 5% a year over the next 3 years as litigation costs drop, the company retains impressive pricing power, and a Republican Congress prevents new and significantly higher federal taxes. The average price of cigarettes nationally remains below $6 a pack and Marlboro remains a premium brand.

If Altria's cost cutting slows and the company is less able of offset slower smoking rates with price increases, the U.S.'s largest tobacco company should still be able rely on its large position in BUD and growth in smokeless tobacco segments to increase the dividend. Altria's payout ratio is also very modest for the tobacco industry at 75%, and the company can still offset significant drops in smoking rates by only slightly raising prices.

Altria's dividend of over 3% a year should continue to increase at a rate above current core inflation estimates, and leading presidential candidates are proposing only slight tax increases in dividend taxes. The Department of Justice is no longer suing big tobacco, and recent civil litigation results in Florida have been favorable for Altria as well. If growth remains slow, interest rates remain low, and taxes on capital gains and dividends remain historically low, conservative investments that offer income above most fixed income investments should continue to trade at a premium.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.