An Analysis of Altria Group

Company Profile: Altria Group Inc (MO)

From Yahoo Finance

Altria Group, Inc., through its subsidiaries, engages in the manufactures and sale of cigarettes and other tobacco products in the United States and internationally.

Market capitalization is $ 145.59B and employs 175,000 people.

Company Fundamentals:

Right from the start, I can see that Altria’s management has done a superb job by generating a consistent return on invested capital of 21.4% over the last 5 years. In fact, just about every single year is over 20% in the last 10 years [19.7% in 2005]. This is an excellent track record.

Return on equity has also been amazing. Unfortunately, it has been on the decline. The 10 year average ROE is 45.1% and the 5 year average is 35.14%. Last year’s ROE further declines to 28.16%. Still an excellent ROE, but the trend is a bit disconcerting.

The equity growth rate has been fairly consistent over the last 10 years. The 9 year average rate is 14.72%, the 5 year rate is 17.31%, the 3 year rate is 15.3% and last year’s equity growth rate was 10.27%.

The earnings per share growth rate has not kept up with the equity growth rate. The 9 year average EPS growth rate is only 6.93%. The 5 year rate is 5.12% and the 3 year rate is 4.74%. Interesting that the equity has been growing faster than the earnings per share.

Sales growth rates are almost non existent. The 9 year average is 1.93%, the 5 year average is 0.51%, the 3 year average improves to 5.29% and last year’s sales growth rate was a mere 2.04%. This is not surprising considering the industry that MO is in.

Dividend Fundamentals:

The current dividend yield is 4%. This is above average and handily beats the S&P 500 Index and the DJIA index for their dividend yields.

Dividend growth rate has been steady as a rock. Each and every year over the last 10 years has come in at around 8% - 9%. The 9 year average dividend growth rate is 8.72%, the 5 year rate is 8.2%, the 3 year rate is 8% and last year’s dividend growth rate was 8.5%.

The dividend payout ratio has been slowly climbing from 50% in 1997 to the current 62%. I assume that MO will continue to raise their dividend payout ratio as they continue their history of raising dividends.

Cash flow growth rates have been in the 5% range over the last 10 years with a 9 year average of 5.96%.

Valuation Models:

Let’s use my my 3 valuation techniques to determine a target price for this company.

From a dividend yield perspective, you would think that the current 4% would be at the high end of the dividend yield range. In fact, it is below the 5 year average low dividend yield of 4.26%! The 5 year average high dividend yield is a eye popping 6.54%. In fact, the 10 year average high dividend yield is consistent at 6.72%.

If I demand the 10 year average high dividend yield, then my target price is $41.10. At the current price of $68.98, Mr. Market is currently demanding a premium of 67.85%! The dividend yield does not look as attractive now.

Benjamin Graham would be in complete agreement. The Graham number works out to $45.36 which means a premium of 52% over the current price.

Using the discounted present value method, I came up with a model price of $66.63. But in fact, this target price does not make sense because I demand a consistent dividend yield of 6.72% and a future dividend growth rate of 8%. However, in order to get that initial dividend yield, I should only be willing to pay $41.10 as calculated by the dividend yield method.

See my MO calculations.

Here is the 1 year stock price chart:

As you can see, MO has been over our target price for the entire last year.

Conclusion:

Although the 4% dividend yield is attractive, it is in fact a very low yield for Altria Group Inc. Depending on your outlook for tobacco sales in the future [which over the last 10 years has been almost non existent], I am not sure that I would consider MO a candidate for a portfolio of superior dividend yielding stocks.

What are your opinions?

Full Disclosure: I do not own any shares in MO.