Altria Group Inc (NYSE:MO) held its annual meeting of shareholders on May 19, 2016. The board of directors declares quarterly dividend of $0.565, in line with previous.
Altria Group is a large company with a market capitalization value that is more than $123.25B as of May 08, 2016; from 2011 to 2015 the company produced adjusted diluted earnings per share growth at a compounded annual rate of approximately 8.1% (which has been reaffirmed in its 2016 full-year adjusted diluted EPS guidance approximately being at the same rate), and has consistently grown the dividend. MO outperformed the S&P 500 by 80% over the last 5 years:
On May 19, 2016, Altria Group Inc. closed at $63.35, up 0.36 (0.57%) from the previous close with 4,379,774 traded on the New York Stock Exchange.
The current market prices make Altria a lucrative buy for investors:
"As of now, the increased share price of Altria Group, Inc. makes it a lucrative buy for investors. A change of 0.57% in the price clearly indicates a strong asset performance for the corporation, bearing in mind the total returns from its investment and dividends or distributions obtained from the investment."( here).
How much is Altria worth today?
To assess this stock I will use a discounted dividend model. What is the best method to assess a stock that pays a safe dividend?
Altria Group has an outstanding long-term track record of creating value for shareholders. For example, the company has increased its dividend 49 times in the last 46 years.
The dividend payout of MO from 1994 to May 2016:
As a cost of capital, I consider a ratio of 11.82% as an average of the entire industry. Data used is as of January 2016. Next 5 years (per annum) is 8.20% according to the analysts' estimates of the industry:
In the Altria guidance for 2016, the full-year adjusted diluted earnings per share ((NYSEARCA:EPS)) represent a growth rate of 7% to 9% from an adjusted diluted EPS base in 2015.
I assume that the annual dividend will increase 8% year over year and at the 5th year, the company will distribute an annual dividend of $3.07:
MO's terminal value: $3.07 x 1.0844/(11.82% - 8.20%)= $91.76.
MO's EV = ($2.26/1.1182) + ($2.44/(1.1182)^2) + ($2.64/(1.1182)^3) + ($2.85/(1.1182)^4) + ($3.07/(1.1182)^5) + ($91.76/(1.1182)^5) = $61.93.
As of March 31, 2016, MO's net debt is $4.61 per share.
MO's intrinsic value is $61.93 - $4.61 = $57.32.
According to my valuation the stock is overvalued by the stock market and with a P/B ratio (mrq) of 44.90 Altria Group, Inc. is signposting that the investors have either overvalued it or that its accountants have undervalued it.
In my opinion this stock may have been undervalued by its accountants: Altria is a faithful issuer of a quarterly dividend and with almost $3.8 billion in cash and cash equivalents on hand with no short-term borrowings. 65% of its debt is due after 2021. This provides a lot of financial flexibility to the company, even though a debt/capital ratio of 82% may be of concern to the investor.
Regardless whether Altria might look overvalued, the best thing to do is to get into this faithful issuer of dividend:
Analysts' target price: the mean recommendation is 2.2 this week in line with the previous one. It ranges between 1.0 (Strong buy) and 5.0 (Sell). Out of 10 analysts, four recommend to buy Altria and 6 recommend to hold the stock as of today.
The mean target price is $65.57 ranging between $69.00 (high target) and $62.00 (low target).
Overvalued or not, this is a company with stable growth and a company that dominates the US tobacco market. Marlboro is the bestselling brand of cigarettes in the USA (and in the world) and achieved a retail share of 44 percent, larger than the next 10 brands combined. It has the most diverse business model among its U.S. peers.
Altria Group Inc. has an average dividend yield of 3.59% vs. 2.24% of the industry. The company is a faithful issuer of a safe dividend and with almost $3.8 billion in cash and cash equivalents on hand there is plenty of cash to pay dividends. The payout ratio ((NYSE:TTM)) is 80%.
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.