High-Yielding Altria Rushes To 52-Week High

Summary

• Altria is a recession-resilient company that has an attractive business model.
• Shares offer a dividend yield of around 6.5%, which is attractive.
• I am bullish on Altria in the long run, but as shares have rallied so much in 2021 already, I don't plan to add to my position right now.
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Article Thesis

Altria (NYSE:MO) is a Dividend King that is as steady as a rock. The company has proven its outstanding resilience again in 2020, despite the pandemic. It can be expected that Altria will continue to generate highly reliable cash flows from its legacy business, while investments in other areas could allow for some growth going forward. Shares are up quite a lot this year, but they aren't especially expensive yet. They are, however, also not an absolute bargain any longer, as the best time to buy was when shares were trading in the $30s and $40s, and not with shares at $50+.

Volatile Stock, Steady Business

Looking at Altria's share price over the last couple of years, one could assume that the company's business was highly volatile:

Data by YCharts

From a high of close to $80, shares dropped by around 50% between the summer of 2017 and the nadir in 2020. Since then, shares have recovered meaningfully, but they are still down compared to where they stood five years ago. This was, however, not the result of a declining business, shrinking earnings, or dividend cuts. Instead, the downward move in Altria's shares was driven purely by multiple contraction.

This can likely be explained by several contributing factors. The first one of these is fear about the company's business model. This started in 2017 when the FDA announced a plan to reduce nicotine levels in cigarettes. So far, four years later, nothing impactful has happened yet, and Altria's results have been strong and getting stronger since then. Altria earned $3.39 per share in 2017 and is on track to earn $4.57 per share this year. This equates to growth of ~8% annualized over those four years, which is a highly attractive earnings growth rate for a high-yielding value stock such as Altria. Altria has not seen its profits drop during any single year in that time, thus the company continues to execute very well. This also holds true for 2020, which was impacted by the pandemic. In H1 2020, some pundits talked about how the pandemic would lead to less smoking and that this could be a threat for tobacco companies such as Altria, but as it turned out, that wasn't what happened - 2020 was a great year for Altria.

Source: Altria presentation

Not only was the company able to keep product sales stable (unlike in previous years, during which the company had seen volumes decline slightly each year), but Altria also was able to grow both its revenues as well as its earnings per share to a new record level in 2020. Neither the pandemic nor its economic fallout hurt Altria in a meaningful way. For those that had been paying attention, that was not a big surprise - the company had already proven its resilience in other crises in the past, including the Great Recession.

Unjustified fears about Altria's future business are not the only factor for the stock's underperformance since 2016, however. On top of that, the market has experienced a shift away from value stocks towards growth stocks, that accelerated in 2020. This was bad news for a reliable performer such as Altria, as investors suddenly discarded its stock, instead opting to buy EV companies, tech stocks, etc. This explains why Altria's shares have fallen especially hard in 2020.

2020 Offered A Chance To Buy At A Great Price

Naturally, for those that remained cool-headed and that foresaw that the pandemic would not mean the end of Altria and other smoking companies, the steep share price decline in 2020 allowed for some very attractive entry points. Shares could be bought in the $30s at some points, and in the low $40s throughout most of 2020. Those that did so have locked in highly attractive dividend yields in the 8%-10% range.

We called stocks a buy three times during the last year on the public page:

Source: Seeking Alpha performance tracker

On top of that, at CFK, we also shared some additional material on the company's stock, including strategies to optimize timing by buying shares when the RSI indicated that they were oversold.

Nevertheless, buying Altria at more or less any point during the last year turned out to be a great idea, even without optimal timing. However, as shares are up by 28% in 2021 alone, one may want to ask the question of whether buying here, in the low $50s, is still a great idea.

Data by YCharts

Right now, shares are trading for 11.2 times forward earnings. that is, in absolute terms, still a very low valuation for sure. That also holds true when we compare Altria's valuation to that of the broad market, which trades well ahead of 20 times forward earnings right now.

However, when we look at how Altria's shares were valued throughout the last year, and throughout the last 3 years and 5 years, then Altria does not look like an absolute bargain any longer. Shares are not expensive by any measure, but buying at 11.2 times forward earnings when the median earnings multiple over the last three years is 11.1 can also not be categorized as an absolute steal. Instead, shares look relatively fairly valued today. This means that shares should have a good chance of delivering solid total returns going forward, mainly through dividend payments, with some growth helping as well. Shares will, however, likely not continue to rise as they did in 2021 so far - another 30% share price gain would make shares look rather expensive relative to the median valuation Altria has traded at over the last couple of years.

Shares offer an income yield of 6.5% at current prices. Analysts are currently forecasting long-term earnings per share growth of 5%, according to YCharts. This means that Altria could generate returns of somewhere around 10%-12% a year going forward - which is definitely attractive. Shares do not have the same upside potential they had at multiple points in 2020, however, as they can't be described as extraordinarily cheap any longer. I personally own a sizeable position that I plan to hold going forward, as the total return outlook is quite nice, and Altria is a recession-resilient income play that can provide reliable income during troubled times. I do, however, not plan to add to my position with shares trading in excess of $50, as I feel that we don't have an outrageously cheap stock any longer.

Takeaway

Altria has a great business model. Through price increases, the company has been able to deliver reliable revenue and earnings growth even though smoking rates keep declining. On top of that, the company's business is very resilient versus all types of external shocks, including the current pandemic.

Shares were a steal in 2020, trading at yields of up to 10%. Right now, shares do still look very solid and not at all overvalued, but due to the hefty gains experienced so far this year (~30% in just three months), we do rate shares a hold for now, and I don't plan on adding to my position at current valuations.

Altria has some very interesting ventures in place on top of its legacy tobacco products, which include vaping and cannabis. We believe that these could pay off in the long run, although they do not generate meaningful profits right now or in the near term. Should this change, e.g. if cannabis gets legalized on a federal level, there could be a substantial short-term upside, but we don't plan on betting on that right now by adding to our existing core position we already have.

Analyst’s 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.