An Analysis of Altria Group

Aug. 9.07 | About: Altria Group, (MO)

Company Profile: Altria Group Inc (NYSE: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.


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.