Altria: Income And Growth Together In A Defensive Business

| About: Altria Group, (MO)

Summary

Altria dividend is high at 3.6% and has been increased each year for eight of the last ten years.

Altria total return outperformed the DOW average for the 48.5 month test period by 79.74% which is fantastic.

Altria also has a $3 Billion buyback program announced in October 2016 and I estimate an increased dividend in August 2017 by $0.04/Qtr to $0.65/Qtr.

This article is about Altria (NYSE:MO) and why it's a great income and total return investment with steady increasing dividends that is 7.7% of The Good Business Portfolio. When I scanned the 5 year chart it was obvious that Altria had a good past 5 year record. Altria together with its subsidiaries has segments that include smoking products, smokeless products and wine. Fundamentals of Altria will be reviewed in the following topics below The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business and Takeaways And Recent Portfolio Changes.

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Altria passes 11 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

Altria is a large-cap company with a capitalization of $133.1 billion. The Company operates in three segments: smoking products, smokeless products, wine. Altria is the largest tobacco company in the United States. One company a previous spin off from Altria is Philip Morris (NYSE:PM) that has a capitalization of $142 Billion and sells tobacco products in the international market worldwide. Philip Morris is 5.7% of The Good Business Portfolio, so the portfolio has the tobacco industry covered worldwide.

Altria has an above average dividend yield of 3.6% that has been increased for 8 out of the last ten years and its dividend is very safe. Altria is therefore a good choice for the dividend income investor and the moderate growth investor with its great total return. The average payout ratio is high at 81% over the past five years and leaves enough cash remaining for stock buy backs after paying its high dividend.

Altria cash flow is good at $5.5 Billion which leaves Altria with plenty of cash allowing it to pay its high dividend and have cash left over for stock buyouts and company investment.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Altria has a three-year CAGR of 8% more than meeting my overall requirement. Looking back five years $10,000 invested five years ago would now be worth $29,900 today (from S&P Capital IQ). This makes Altria a good investment for the income investor with the addition of moderate growth in a defensive industry.

S&P Capital IQ has Altria a five-star rating or strong buy with a price target of $76.0. Altria price is 22% below the target. MO is a good buy at the present price for the income investor who in addition to moderate growth in a defensive business.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Altria beat the Dow baseline in my 48.5 month test compared to the Dow average. I chose the 48.5. month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. The fantastic total return of 131.51% makes Altria a great investment for the total return growth investor. Altria Has increased its dividend for 8 of the last 10 years and presently has a yield of 3.6% which is well about average for the income investor and the total return is great which makes MO a pick for the total return investor. Looking at the earnings projections and the dividend payout ratio it suggests that the Altria dividend will be increased from $0.61/Qtr. to $0.65/Qtr a 7% increase in August 2017.

DOW's 48.5 month total return baseline is 51.77%

Company Name

48.5 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Altria

131.51%

+79.74%

3.6%

As seen in the 5 year price chart below Altria has a good chart over 2012-2017 YTD, that shows a steady long term growth going up and to the right. The chart is great because it shows the strong steady growth over the 5 year period beating the DOW when the DOW average is up 51%.

Last Quarter's Earnings

For the last quarter on October 27 , 2016 Altria reported earnings that beat expected by $0.02 at $0.82 compared to last year at $0.75. Total revenue was higher at $5.19 Billion than a year ago by 4.2% year over year and beat expected by $80 Million. This was a good report with bottom and top line increasing. The next earnings will be out in February 2017 and is expected to be $0.67 compared to last year at $0.67. The company also continues its share buyback program and in October 2016 increased its buyback program to $3 Billion. Altria with decreasing smokers can grow its revenue by increasing the price because the product demand is inelastic.

Business Overview

Altria Group, Inc. is a holding company. The Company's subsidiaries include Philip Morris USA Inc. (PM USA), which is engaged in the manufacture and sale of cigarettes in the United States; John Middleton Co. (Middleton), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco, and UST LLC (NYSEARCA:UST), which through its subsidiaries, including U.S. Smokeless Tobacco Company LLC (USSTC) and Ste. Michelle Wine Estates Ltd. (Ste. Michelle), is engaged in the manufacture and sale of smokeless tobacco products and wine. Its segments include smokeable products, smokeless products and wine.

Smokeless tobacco products sales should continue to increase over time and the possibility of offering marijuana in states that allow it can always happen even though I think it is remote right now.

On December 6, 2016 PM Filed and stated "Upon regulatory authorization by the FDA Altria's companies has exclusive license to sell heated tobacco product in the United States". This should be another growth potential for Altria going forward.

Source: Altria

The products of Altria especially the tobacco products are inelastic giving the power to raise the selling price with minimal negative demand effect.

Takeaways and Recent Portfolio Changes

Altria is a dividend income and good growth choice. Considering Altria stock price and its total return over performing the Dow average Altria will be held by The Good Business Portfolio and may be trimmed when it gets above 8% of the portfolio. The income investor has a reasonable entry point to lock in this above average yield with moderate earnings and growth going forward. If you don't already have a position in the tobacco industry Altria may be a company for your income portfolio.

Harley Davidson (NYSE:HOG) January 6, 59's covered calls were bought to cover and new calls, February 3 ,60's were sold to gain more time value.

Added to position of Texas Instrument (NYSE:TXN), now at 4.0% of the portfolio. TXN is now a full position in the portfolio.

Added to position of Ingersoll-Rand (NYSE:IR) now at 4.0% of the portfolio a full position.

Added to position of Digital Reality Trust (NYSE:DLR) now at 0.93% of the portfolio. I feel the computer industry facilities business has nowhere to go but up and DLR pays an above average dividend. I wrote an article on Digital Reality Trust in September of this year if you are interested.

The portfolio has filled in a open portfolio slot with PepsiCo (NYSE:PEP) to 0.6% of the portfolio and may be followed by Kellogg or Raytheon when the next slot is open.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 7.9% of the portfolio, Altria is 7.7% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio and Boeing is 9.2% of the portfolio, therefore BA is now in trim position with Home depot , Johnson & Johnson and Altria getting close.

Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs at $151 Million in the third quarter. The recent earnings blew away the estimate of $2.63 and came in at $3.51. BA has received a large order for 15 747-8 planes which will help keep this line open. BA is a long term buy and has a backlog of over 7 years.

For the total Good Business Portfolio please see my recent article on The Good Business Portfolio: 2016 third-Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, JNJ, MO, HD, OHI, HOG, IR, TXN, DLR, PEP, PM.

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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