Altria Group (MO) is one of the most popular stocks among dividend investors and rightly so. The stock has consistently boasted a high yield and has managed to increase dividend for 40 plus years. However, it increasingly looks like the company's best days are behind it. This article lists some of the alarming facts about the company.
Decreasing Earnings Power: The chart below shows the decreasing EPS over the years. From $1.05/share in June 2007 quarter, EPS has dropped to the present level of 41 cents a share. Yes, Altria spun off into three different entities and hence the reduced EPS. But that doesn't change much about the future earnings power. US tobacco is by no means a growing industry and this trend is likely to continue. Also, lobbying charges as usual eat up a huge portion of its profits.
Yes, Altria is diversified through its wine business and SABMiller. But there is no denying Cigarettes are the bread and butter as shown in the table below.
(click to enlarge: Source: ycharts.com)
(Source: Trefis.com)
Historical PE: Altria is right now trading at a valuation that it has not seen in a long time. The table below shows its PE over the past 10 years and today's PE of 19 is higher than any of the numbers below. For a company with decreasing earnings as shown above, an increasing PE shows investors are rushing in just for the yield factor, which we will address below.
(click to enlarge)
Source: Ycharts.com
Selling On Strength: The wall street journal publishes the list of stocks which have highest money inflow and outflow. It's not a surprise that with the recent spike in the stock price, Altria topped the "sell on strength" list on Friday, April 13th. This selling will most likely continue as Altria has already met the price target set by most of the big firms and they tend to reevaluate the holdings at such stages. Maybe these sellers realize Altria is trading at such a lofty valuation compared to its usual levels.
Financials: Everyone loves Altria's dividend but not many take a look at the financials. While there are some well known factors like a 100% payout ratio, not many realize its debt is about four times its cash. US companies like Lorillard (LO) and Reynolds American (RAI) have much better cash/debt ratio.
Another area of concern is the payout ratio. With decreasing earnings, Altria has so far managed to pass on extra costs to the consumers by increasing prices. Even though people would still pay for their Marlboro, there is only a certain limit to which it could increase the prices.
Conclusion: Altria has been a great dividend stock for a long time. And will likely continue to be a decent holding. What makes it not so attractive is the presence of international alternatives like Philip Morris (PM) and British American Tobacco (BTI). Also, it is currently trading at a significant premium to its growth potential to add more shares or to initiate a new position. Investors who hold the shares from a much lower price level might want to stick with it though. Putting all these together, we believe the odds of getting smoked is higher than the odds of Altria smoking it out of the park.
Disclosure: I am long PM.
