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Altria: 8.6% Dividend Yield With 35%+ Re-Rating Potential

May 02, 2020 12:02 PM ETAltria Group, Inc. (MO)BTAFF, BTI, BUD, BUDFF, IMBBF, IMBBY, PM129 Comments
Librarian Capital profile picture
Librarian Capital


  • Altria reported mid-teens revenue growth and high-teens EPS growth in Q1 2020, helped by consumers "pantry loading" due to COVID-19.
  • The U.S. cigarette market further stabilised, with Altria's volume decline moderating to 5%, and the e-vapor category shrinking again.
  • While Altria withdrew guidance, this was partly due to its ABI stake, and it reiterated the commitment to the dividend (now at an 8.6% yield).
  • Altria's valuation multiples are the second cheapest among the tobacco Big 4, apart from the structurally-challenged Imperial Brands.
  • At $39.25, shares are likely to return more than 10% annually in the Base Case, and 45-70% over the next 12 months in the Bull Case. Buy.


We are reiterating our Buy rating on Altria (NYSE:MO), having reviewed our investment case after Q1 2020 results released on Thursday. Since we upgraded our rating to Buy on February 1 ("Altria: E-Vapor Threat Reversed In Q4, Upgrade To Buy"), shares have lost 15.7% (after dividends), roughly in line with the S&P 500 index:

Librarian Capital Altria Rating History vs. Share Price

NB. Share prices as at the time of writing, as recorded in each article.

Source: Seeking Alpha (01-May-20).

Buy Case Recap

Our Buy rating is based on what we saw as an asymmetric risk/reward where:

  • In the Base Case, the near-term downside risk has receded, as the volume decline in Altria's core cigarettes business has started to decelerate with the U.S. e-vapor category reversing from growth to decline in Q4 2019 after a regulatory clampdown. Provided the annual volume decline is no worse than 5%, with rising prices and falling costs, EPS could grow at 2.5%+, and share price growing in line with it. This, combined with a high-single-digit dividend yield, gives an annualised return of 10%+.
  • In the Bull Case, with investor sentiment on the cigarettes business improving and/or Altria achieving strong growth in Reduced Risk Products, the shares could re-rate substantially upwards. There is a meaningful chance of the share price returning to the $55-65 range seen in much of 2018; for example, if the shares re-rate to a 5.5-6.5% dividend yield.

Q1 2020 Group P&L Headlines

Altria's headline results for Q1 2020 are shown below. Including the effects of inventory moves and an extra trading day, Net Revenues After Excise were up 15.0% year-on-year, Operating Companies Income ("OCI") was up 19.5%, Net Income was up 17.3%, and EPS was up 18.3%:

Altria Group Financials (Q1 2020 vs. Prior Year)

This article was written by

Librarian Capital profile picture
We are no longer publishing new content on Seeking Alpha. To get in touch, use the website or Twitter account on our profile, as comments and messages on this site are no longer checked regularly. Articles published under our name on Seeking Alpha were personal opinions, based on information believed to be correct at the time of writing, but not updated. Librarian Capital is an independent third party that published articles on Seeking Alpha on an ad hoc basis, and we have had no contractual relationship with Seeking Alpha beyond the terms and conditions under which those articles were published.

Analyst’s Disclosure: I am/we are long MO, 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (129)

CorvetteKid profile picture
MO senior management must ALL go along with Willard.

Institutional investors have no faith in these clowns.
Librarian Capital profile picture
Thank you for sharing your views, @CorvetteKid, but I am not sure if things are as bad as that. We will find out more at the vote at this week's AGM (14 May).
CorvetteKid profile picture
They blow $15 billion in 2 years and you think things aren't as bad as that ?

That's 2 years worth of dividends that they threw away. They not only made bad investments, they chased asinine pricing at the peak.

Librarian Capital profile picture

I was referring to the attitude of institutional investors towards management, based on my experience interacting with both sides in the past. On Altria's capital allocation, the articles I have published on Seeking Alpha provide a record of my scepticism towards Juul and Altria's non-core investments.
WelshWB profile picture
@Librarian Capital

As a long term investor I was pleased to hear the April announcements from Altria:

- The retirement of Willard
- Split of CEO & Chair role
- Appointment of Martin King for IQOS (although that was in March)

The investment in JUUL seems to be a bit of dud for obvious reasons however the real opportunity exists in IQOS. I think if Altria is able to replicate the same success as Phillip Morris with IQOS then potentially it may change the narrative for the tobacco industry of USA i.e. from one in terminal declines with respect to volume to an industry with stable volume.

With respect to BAT I think the reason why they haven't done anything about Glo in America is because they are still waiting for approval, which takes approximately 2 years. Approval for Glo was submitted in February 2018 so they should have heard something back by now. However thanks to the pandemic it might not be until next year.
Librarian Capital profile picture
Thanks, @WelshWB - fair points on the potential of IQOS. As I mentioned in the article, the Bull Case is that "Altria would realise its upward re-rating potential, from investor sentiment on cigarettes improving and/or it demonstrating strong growth in RRPs".

I think BAT has under-invested in Heated Tobacco, and that has contributed to how they still haven't got FDA approval. They ultimately think that most of the world is going to be an e-vapor market, and in addition to the US they are some time away from launching glo in Western Europe too.
WelshWB profile picture
@Librarian Capital

On HNB segment I do agree there was a degree of complacency on the part of BAT. However I think in the long run BAT will be able to build a profitable RRP division due to the structural advantage BAT enjoys. I think BAT is waiting to see how things work out with IQOS before they make a serious commitment to USA.

Focusing on vapour segment isn't a bad thing for BAT because even without growth in the segment, thanks to PMTA the sector will be consolidated by the major players therefore BAT can maintain growth by absorboing the marketshare of vaping companies that will go out of business thanks to PMTA.

I now believe that it would actually be better if JUUL fails for Altria even though they have invested $12 billion and it means a hefty loss. If JUUL succeeds Altria will get to own a third of a company. Whilst if JUUL fails and Altria re-enters the vaping segment it can build a new company which Altria shareholders get to own 100%. I think for a company like Altria the cost to develop and market vaping device will be a drop in the ocean.

In the past Altria failed because there was no barriers to entry but recently the game in USA has changed. The condition is more favourable towards a tobacco company compared to a start up entering the vaping sector. This includes the adverse publicity which may make it difficult to raise capital to invest in such business, building up scale to make it profitable and the byzantine regulation that you have to navigate through to market the product which is also cost prohibitive.
Librarian Capital profile picture
Thanks, @WelshWB - I am glad we now agree on the view that "it would actually be better if JUUL fails for Altria", which is something you will remember I discussed on my previous articles.

On BAT and e-vapor they may actually be right that HNB won't work for the US. There are certainly enough geographies where HNB won't work for PM to have announced plans to launch their own e-vapor offering (IQOS VEEV) (planned for this year originally, now delayed).

However, this being an article on Altria, the points I am trying to make are: (1) on e-vapor both Juul and other e-vapor products are shrinking; (2) on heat-not-burn there is no one except IQOS and that is slow. IQOS being successful would be good and potentially what takes upside on Altria to 35%+; but it's fine with a low-teens return without this happening.

I think it's now too late for Altria to make its own vaping device. Aside from the technological issues, there are regulatory constraints - new devices have always needed FDA approval, the ones on the market have been allowed so far because of grandfathering clauses, and even for them there is a FDA PMTA deadline in September this year.

And Altria did have its own e-vapor products (MarkTen for closed tank, Greensmoke for open tank). So I don't they will try again - most likely they will license that from PM too.
kkvakk profile picture
@Librarian Capital are you buying stocks in this environment?
Why not give the market a month or three to fall and give you a better entry price? The market is gonna find out that the virus has not disappeared with the lockdown.
Librarian Capital profile picture

Thanks. You can track my monthly purchases on my blog - the April one should come out in a few days:


I bought a fair (net) amount in March, but haven't made any material purchases in April. That is more a function of me having hit risk limits on individual stocks and prices seeming unattactive based on bottom-up analysis in others. In general I do not believe in top-down market timing.
What do you think would drive the Industry to re rate? The markets down rated due to JUUL investment, and now the COVID impact. However your article indicates that the markets are in general not kind to Tobacco. What do you think would re rate the industry?
The worst the economy or the more stressful the people, they generally smoke more. This is human behaviour.
Special Companies Watch profile picture
They rerated a few years ago for no reason. They will rerate for the same reason
Librarian Capital profile picture

The potential upward re-rating could come from "investor sentiment on the cigarettes business improving (once investors become convinced that US cigarette volumes have stabilised) and/or Altria achieving strong growth in Reduced Risk Products".

Note that I do not view all tobacco stocks alike. Imperial Brands and its less followed peer Japan Tobacco will have a much harder time to recover, since they have much less potential in RRPs and much exposure to mature markets (the UK, Japan). So I don't think the whole industry would necessarily re-rate up.

Investor sentiment is fickle. It's also worth remembering that, after the Juul investment in December 2018, Altria shares first dipped down from c. $50 to the mid-$40s, then shot up to the high $50s before falling again.
Thanks alot, I enjoyed the article. I'm thinking of building a small position in tobacco stocks, the big 3(or 4) all seem like good bets but I was leaning BTI, any chance you could do a comparison article between them sometime?
Librarian Capital profile picture

Thank you for your question. I have already published articles on both companies in the last few months, and you can compare them easily from those. Key differences:

Altria is 100% US, whereas BAT is 40-45% US with about 25% in EM
Altria has access to Juul and IQOS, so far better than BAT's Vuse and glo
Altria's Debt / EBITDA is 1-2x lower than BAT (see chart above)
DAMNYOUMARKET profile picture
Instead of buying Juul, MO should have put the $15 billion into BUD
arthur_bishop1972 profile picture
They should dump BUD next year and get a piece of Heineken or TAP.
Librarian Capital profile picture

This is only true in the sense that BUD share price has fallen "only" 60% since December (and there have been dividends) vs. Juul's value being written off by 65%+. The "diversification" so admired by many Seeking Alpha columns has been foolish.
Librarian Capital profile picture

I think giving the money back to shareholders would be better. There are no synergies, and likely very little in tax advantages. Investors who want to hold Heineken or TAP are perfectly able to do so on their own.
Greg_Maryland profile picture
Interesting note.
It's been a nice stock for covered calls for me.
Librarian Capital profile picture
Making investment decisions based on emotional or political views is generally a bad idea, but thanks for sharing.
Librarian Capital profile picture

My apologies for this comment appearing under yours - it was meant as a response to a different comment, but for some reason had appeared under yours. You may have guessed this already since what I wrote about "political views", etc, made no sense next to what you wrote.
Greenhorn Investor profile picture
Thank you for the article.

Long the Big 3
Sanjay John profile picture
I am long MO because I am a hedonist who hates medics telling me what is healthy and how to live my life, example is the Covid junk science of now, stay locked up for your own health and of others.

I dont even smoke. But want my fellow humans to enjoy the simple pleasures of life like smoking.
Librarian Capital profile picture
Making investment decisions based on emotional or political views is generally a bad idea, but thanks for sharing.
Sanjay John profile picture
Of course I have analysed MO financials and they look great to me.

But I am not into socially responsible nanny investing ideas.
Great article. Thanks for the time investment. I wanted your feedback on MOs IQOS opportunity ? I think it could be a HUGE home run. As, you know the FDA has approved it as they believe it will reduce traditional smoking. PM shipped 60bb units in 2019 and are experiencing huge sales growth in Japan and Germany. I believe MO will start a national riollout in the next 12 months ? from my reading it will take BAT a few years to be approved to sell its GLO unit in the US ? Ive been wondering if BATS lawsuit against PM has merit ? as , it could prevent MO from a national rollout. Laslty, I believe IOQS could replace JUUL and win over tons of traditional smokers as I hear the taste and experience is closer to the real thing. I will shut up now. I look forward to your feedback ? thanks again for a great informative read. Blessings.
Problem is, MO has to incur costs to sell IQOS and pay royalties to PM. Not sure how much of a game-changer it will be for MO (at least in the short-term.) Long MO anyway.
That’s why you want to split your tobacco investment between mo and pm
Librarian Capital profile picture
@Serve Others

The success of IQOS in the US remains speculative. It is worth noting how tobacco tastes differ significantly by local markets - IQOS thus far have been most successful in Japan, Eastern Europe (Russia especially) and Southern Italy (Italy in particular). BAT could be right when they claimed the US would be a mostly e-vapor market.

Heat-not-burn and e-vapor have very different tastes, so many people who like Juul will never switch to IQOS, but I agree that IQOS is likely a better substitute for traditional smokers.

Based on PM's history in Japan (where the roll-out took several years), and Altria only having IQOS in 2 cities for now, I think having a national roll-out in the next 12 months is too optimistic.

So my base case on Altria and PM only have marginal contribution from US IQOS. However, both MO and PM have perfectly solid businesses so the success of IQOS will just be a nice incremental upside.

I am afraid I have little to add on the finer points of patent litigation, except the view that I believe PM management to be generally quite good with legal and regulatory affairs.
Very good article. Long MO, PM, BTi
Librarian Capital profile picture
Thank you, @Sunshine123
Shangrila Value profile picture
Why is a dividend cover of 1.2x (based on FCF) together with the debt, is maintainable?
Librarian Capital profile picture
@John Beardslee

Thank your for the question. The situation is maintainable because earnings are growing in general, FCF is after interest payments, and the Net Debt / EBITDA ratio improves even without repayments thanks to EBITDA growth (the ratio fell 0.1x during Q1).
Librarian Capital profile picture
@Roger Lignugaris

Thank you, while I agree a lot of high-dividend-yield stocks are value traps, we will struggle to ever make any money if we always assume that low valuation means bad investments.

Vaping cannibalises cigarette sales, and Altria owns less of Juul than it has market share in US cigarettes, so the failure of Juul is good news for Altria, at least up to the medium term.

It may well be that "Corona-19 unemployment is taking aim at Marlboro smokers", but it will impact all consumers. Tobacco will prove more resilient, and tobacco stocks will become relatively more attractive in a low-growth world.
How would MO compare to PM and BTI? What would the projected impact of currencies be on this trio over the next 12 or more months?
Librarian Capital profile picture
@Retired And Planning

Thank you. I have written articles on all 3 stocks.

In general, the impact would be worst for PM (since they are 100% non-US), not as bad for BAT (since they are 55-60% non-US in EBIT terms) and zero for Altria (since they are 100% US).

The question you asked is almost impossible to answer more specifically given "projected impact of currencies" can come in almost an infinite amount of permutations of currencies and sizes of moves.

At the moment, Philip Morris is saying they will likely take a 12 cent hit in Q2 EPS; last year was $1.46, so this is high-single-digit. BAT is expecting a 2% hit to their EPS from FX, but their reporting currency is GBP which has fallen slightly vs. USD, so I am going to guess just under 5%.
Special Companies Watch profile picture
You can't predict currency movements.
Librarian Capital profile picture
Good point, @Special Companies Watch - but it is worth noting the impact of currencies just from the levels they are today.
CorvetteKid profile picture
Willard the CEO who blew $13 billion on JUUL is gone. Now let's get rid of the rest of the Board who signed off on that asinine deal.
Librarian Capital profile picture

I don't disagree investing in Juul was a mistake. But how many people were able to say that confidently at the time? To take an easy example, just look at how many articles there have been on Seeking Alpha praising Altria's "diversified" portfolio of e-vapor, cannabis, beer and even wine (which have only recently become less frequent as the write-downs accumulate).
I am not so sure investing in juul was a sunk cost to sink a missile aimed at traditional cigarettes. MO probably knew that partnering with JUUL would create antitrust and competitive issues. Also, they probably knew of gottlieb and the administration issues that would unfold with their involvement with JUUL. They are experts in the regulatory market of nicotine and tobacco products. With JUUL being heavily scrutinized, it makes way for IQOS and other self generated Vape products for Altria to profit off
Librarian Capital profile picture
That’s a very generous interpretation of what happened, and conflicted with the reality that it was Juul’s sales practices and growth, not Altria’s investment, that drew regulators’ wrath.
Dividend Ambassador profile picture
@Librarian Capital I hope all turns out well and there are reasons to think it will as laid out in this article. BUT, i didn’t find the language on the dividend particularly re-assuring. AND I do not think the author is right IF he is saying that’s MO has reaffirmed its commitment to continue to pay and raise the dividend. The 80% of diluted, adjusted EPS formulation MO came up with in reference to its dividend could cover: 1) a dividend raise; 2) a dividend freeze; or a dividend cut all depending on what the 80% of diluted EPS turns out to be! That Lawyerly formulation coupled with pulling guidance of EPS projections really seems to suggest that they MO management does not have a fix on what they may have to do re: the dividend. On the conference call this tricky formulation was not clarified. It was just repeated. If MO is convinced it will be able to continue to pay and raise the dividend they could have simply said that.

I’ll only add that the author himself seems to use cute language RE: the dividend. If you read the article quickly you come away w the impression that all is well and MO will carry on as normal w divi payments and divi raises BUT, his section on the dividend is titled, Reaffirmed Commitment to Dividends. That is almost a wiggly as the MO formulation. Is he convinced that MO will continue to be a Dividend Aristocrat or Champion or King or whatever it is and continue to raise the dividend. OR does he think there is a good chance of a freeze or cut. You could have a “commitment” to the dividend and still have a freeze or a partial cut.
CorvetteKid profile picture
Unless cigarette sales accelerate to a decline of about 8% annually, the dividend is covered.
Librarian Capital profile picture

Thank you for your comment. I don't think we should get too "cute" in applying Kremlinology-like forensic approach to the language used by management and investors.

As @CorvetteKid's comment has touched on, a company's dividend-paying power is ultimately underpinned by its earnings power. Altria can grow its dividends provided it can grow its earnings - which I believe they can at least a low-single-digits even with relatively large (5%) volume declines.

There is some volatility in Altria's earnings in the short term, due to the Covid-19 outbreak, and there one should refer to the second part of what management said on dividends, about strong cash generation and balance sheet.

And, just in case I haven't been contrarian enough here, I find labels like "Dividend Aristocrats" misguided, and all too often used by unscrupulous investment writers to entice unsophisticated investors, especially among the retired. Investment decisions should be based on understanding company EARNINGS in the next 5-10 years, if not longer, NOT mechanically assuming whatever happened to DIVIDENDS in the last 25 years will simply continue.
MO definitely added additional thoughts on the dividend that makes one ponder things a bit. I’m hoping their intention is to lay the ground work for a dividend freeze should the Covid recession last longer than expected. They were smart to not blindly reaffirm the dividend, so many high dividend companies say that and then the lawsuits start if they have to cut. Let’s hope at worst there is only a freeze.
BM Cashflow Detective profile picture
I don't think people have returned to cigarettes due to recent negative publicity in the e-vapor category, as well as regulatory and legal developments. "Hey, I'm smoking cigarettes now because I don't like the newspaper coverage anymore." Honestly, such a nonsense. In my opinion, most people just come back because cigarettes simply taste better. The taste of smoke is simply incomparable and irreplaceable. The other smoke-free products are good and also profitable alternatives. But only alternatives. No real replacement. I have no proof of that, but I don't think people who really want to smoke will let it stop them. Maybe some, but never all. This conviction is part of my long-term investment thesis regarding MO, PM and BTI.

MO has enormous long-term competitive advantages. It works in one strongly regulate market. Additional competition from new companies is practically impossible. It has very strong brands across the product portfolio, including the No. 1 cigarette brand. The pricing power and brand loyalty is enormous. In addition, MO has low manufacturing and distribution costs thanks to its economies of scale. In addition, disproportionately high cash flows and return on investment. And the nicest thing is, the tobacco industry is always talked dead. This is probably one of the main reasons why MO is cheap most of the time. Since I will also always be on the buyer side, there may be many options for adding MO in the future. For me, tobacco industry stocks are simply fantastic long-term investments.

Incidentally, my personal opinion is that everyone has also the right to unreasonable enjoyment as long as you don't restrict other people.

Forever long MO, PM, BTI.
Librarian Capital profile picture
@BM Cashflow Detective

I can see your logic, and it may well be that the statement "cigarettes simply taste better" became more true after the cessation of sales of flavoured pods (including mint) from late 2019 onwards, depending on manufacturer. Here regulatory and legal developments definitely play a role.

What you said about taste reminded me a lot of what Philip Morris executives say (they also mentioned form, habit, etc.). I think there is a reasonable chance that Heat-Not-Burn will prove a sufficiently good replacement at least for certain smokers - which is why I have always been more bullish on Philip Morris.
Don't forget every state needs the tobacco settlement money. Even when they went though the tobacco lawsuits they did not cut dividend. MO knows politics and people in government. They will be a big player in cannabis.
Librarian Capital profile picture

"MO knows politics and people in government"

What's your explanation for Altria investing in Juul at near the peak (Dec-18), just over 6 months before the multiple regulatory clampdown from the FDA and state authorities on e-vapor (from summer 2019 onwards)?
fruitdoc profile picture
MO spinned PM off in 2008. the pre spinoff div was 0.8/qtr in 2006 ,then went down to 0.29 /qtr in 2008 and kept going up to reach is 0.8 /qtr. in 2020 was there a div cut when PM was spun off ? ( shareholders of MO were given a "special div " of 50.580 $ on spinoff date )
Librarian Capital profile picture

I am afraid I don't understand the question or its relevance to the investment decision today, but thank you for commenting.
fruitdoc profile picture
My question is . did MO ever cut its dividend in the past ?
Librarian Capital profile picture

Altria has not cut its dividend in the recent past and management claimed in 19Q4 to have "increased the dividend for the 54th time in 50 years" last year, but respectfully I don't think this question matters.

Being impressed by a company never cutting its dividend is like a housewife (or househusband?) being impressed by her (his?) spouse always bringing home flowers every day - it doesn't necessarily reflect if he (she?) had a good day at work and could be kept up with unnatural acts like borrowing ...
William777 profile picture
Thank you.
Librarian Capital profile picture
Thank you, @William777
InfoLit profile picture
Only problem is cigarettes are becoming expensive compared to individual income. If that trend continues, decline in tobacco consumption will accelerate to dangerous levels for MO.
Librarian Capital profile picture

I don't disagree with the maths or the logic in terms of something like this happening eventually - but with a 8.6% Dividend Yield, even a 2.5-3% EPS growth each year would give you more than 10% in annualised returns. And then there is the additional upside if they could get IQOS and On! (modern oral tobacco) to generate substantial sales, and these products won't have the same volume declines as cigarettes.

The key here is that, even if we assume a higher-than-historic-average 5% volume decline and a lower-than-history 4% price/mix benefit each year, the simple fact that they will be selling fewer units will generate enough of a reduction in cost of sales that EPS could still grow at 2.5-3.0% - see my previous article for details:

ferjen profile picture
People will give up everything else first before giving up cigs and cell phones. They'll even give up food. Crazy, but true.
Librarian Capital profile picture

I mostly agree, but we have to keep in mind that at least some people will be trading down to discount cigarettes; MO has some branded discount cigarettes but they are lower-margin.
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