The Bears Aren't Holding Back Altria

| About: Altria Group, (MO)


Altria's stock didn't suffer so far from the current bearish market sentiment.

The company still aims to see a gain of 7-9% in its EPS, even though the U.S. economy is slowing down.

If the company were to reach its EPS goals, the dividend could be raised by 5 cents this year.

Even though there is a bearish market sentiment stemming from concerns over global economic woes, shares of Altria (NYSE:MO) have suffered so far. The company's stock is slightly up for the year. The company also expects its earnings will rise in 2016 - this will keep Altria on course towards raising its dividend again later in the year. And unlike Philip Morris International (NYSE:PM), Altria won't suffer from a stronger U.S. dollar or slower growth in other countries outside the U.S. But while Altria doesn't face some of the challenges other tobacco companies cope, it still have to deal with some other uncertainties.

Altria's Q4 EPS came a bit short of market expectations - the consensus among analysts was $0.68 - at $0.64, but after accounting for special items the EPS was actually $0.67. In either case, this result wasn't far off market estimates and didn't seem to have much an adverse impact on the company's stock. Moreover, the tobacco giant has also released its outlook for 2016. And the management estimates the EPS will range between $3 and $3.05 or a mid-point of $3.025. This means, the company anticipates a growth of 7%-9% this year. This guidance, however, doesn't account for the impact the AB InBev and SABMiller merge may have on the EPS.

This growth rate could fall, however, if the U.S. economy is cooling down. The latest reports call into question whether the economy is heading towards another recession, which includes lower growth in the U.S. GDP in general and consumer spending in particular. In the last Q4 GDP report, the growth rate was only 0.7%. Although in the last NFP report, wages were up by 2.5% for the year, U.S. consumption, a major component in the GDP, may not be rising at a similar rate. The recent PCE report showed consumer spending was flat back in December, even though personal income grew by 0.3%. And while cigarettes consumption is more immune to recessions than other consumer goods, demand could still contract -- particularly among younger consumers, who haven't locked in their consumption patterns and are more vulnerable in times of economic slowdown.

Dividend and buybacks

Currently, the company's annual dividend is at 3.8%. In recent years, the dividend rose by 8%-10%, even though the EPS didn't always increase by a similar rate. Altria plans to keep its payout ratio of 80% -- back in 2015 the payout ratio was around 81%. Since the EPS is expected to rise, on average, by 8%, year on year, and since the dividend is usually raised in Q3, the dividend is likely to be raised by around 4 to 5 cents, which is roughly 8%-9%.

Besides paying back its shareholders via dividend, the company also repurchased nearly 0.6 million shares for a total of $35 million back in Q4 - albeit this is a small drop for a company with a market cap of over $118 billion. Nonetheless, during the year, MO bought 10.7 million shares at a total cost of $557 million. Considering the 2015 annual average price of the stock was $52, the annual buyback yield was of 0.5%. But shareholders are likely to prefer to receive profits via a dividend and not buybacks.

Final point

Altria has had a good year and even though the company still faces challenges including a possible economic slowdown in the U.S. that could curtail the demand for its products - mostly among young people. But the company is still likely to do well and the stock will continue to be less adversely affected by the current bearish market sentiment compared to its peers.

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.

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