Altria: Overpriced Now, But More Than Just Smoke

| About: Altria Group, (MO)
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Altria is restricted to the regulated U.S. tobacco market, which makes it a low-growth prospect.

The stock is currently overvalued by 10%.

Investors should still consider it for the long-term when the share price falls.

In my previous piece on Philip Morris International, I stated that the advantage that it has over Altria Group, Inc. (NYSE:MO) is the huge number of international markets that Philip Morris has access to which are unencumbered by the restrictions on tobacco and declining rates of tobacco use that are characteristic of the U.S. market to which Altria is restricted. This seems to make Altria seem like an unattractive stock for the long-term, though investors have bid the price up in recent times.

Currently, Altria is trading in the low-$60 range at a price-to-earnings ratio of 21.48, a forward P/E ratio of 18.48, and offers a dividend yield of 3.95% with a payout ratio of 78.50%. The current P/E ratio is above that of the S&P 500's P/E ratio of 19.6, though the forward P/E ratio is slightly below this. Both figures, however, are above Altria's own five-year average P/E ratio of 17.8. Furthermore, the dividend yield is lower than Altria's five-year average dividend yield of 4.66%.

It seems, then, that Altria is somewhat overvalued at this time. Earnings per share over the past twelve months was $2.88, and EPS growth over the next five years is estimated at 8.4%. Using an 11% discount rate - the stock market average - I calculate fair value for Altria at $58.19. The stock is overvalued by 10% at this time.

So, we have a business in a declining market whose stock is currently trading at 10% over fair value, and at a higher valuation than its five-year average. However, while Altria should not be bought now, that does not mean that it should be sold if you already own it. Nor does it mean that it should not be bought in future when the share price falls.

While tobacco use is in decline, it will take a long time for this trend to take effect, so Altria will not simply go up in smoke. In fact, the revenue and net income figures for Altria over the past five years are very healthy looking.

Year Revenue ($) Net Income ($)
2011 23.80 billion 3.39 billion
2012 24.62 billion 4.18 billion
2013 24.47 billion 4.54 billion
2014 24.52 billion 5.07 billion
2015 25.43 billion 5.24 billion

The share price has been bid up because tobacco stocks are classic defensive investments which offer excellent, reliable dividend yields. Even now, Altria's 3.95% dividend yield qualifies as such, but if interest rates rise - as it is expected that they will in December - that dividend yield will likely rise back to around its five year average.

Furthermore, while Altria is not likely to enjoy rapid growth going forward, it should prove to be a stable investment going forward. Its subsidiary, U.S. Smokeless Tobacco, LLC, provides smokeless tobacco products and offers a range of red, white, and sparkling wines, which are supplied to airlines and cruise ships worldwide and exported to countries such as Canada, Germany, Japan and Switzerland.

The figures for UST are promising for Altria going forward. Revenue for smokeless products in 2015, after excise taxes, were $1.746 billion, a 4.5% increase on the $1.671 billion generated in 2014. Revenue for wine were also impressive, with $668 million being generated after excise tax in 2015, a 7.7% increase on the $620 million generated in 2014.

In addition, Altria will also benefit going forward from its large equity stake in Anheuser-Busch Inbev (NYSE:BUD). Prior to Inbev's acquisition of SABMiller (OTCPK:SBMRF) (OTCPK:SBMRY), Altria was SABMiller's largest stakeholder with a 27% stake in the firm. With the Inbev acquisition, Altria now has a 9.6% voting stake in Inbev and gained $5.3 billion in pre-tax cash from the acquisition, and this capital will serve Altria and its shareholders well going forward. Finally, the smokeable products are still generating profits for the company. The Marlboro brand has market dominance in the U.S. tobacco segment, holding 44.0% of market share, and continues to contribute a substantial amount to Altria's bottom line.

To conclude, Altria should not be bought now by prospective investors, but they should keep an eye on it for when it drops below fair value and incept a position then. Current Altria shareholders should simply hold and enjoy the dividends. The company's long-term prospects remain solid.

DISCLAIMER: I am not a financial professional and accept no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.

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.