3 Reasons Altria Is Set To Soar And Too Cheap To Ignore
Summary
- Many investors dream of making a fortune in the stock market, and ensuring a comfortable retirement. It doesn't take genius, just disciplined financial science.
- Today, Altria is 25% undervalued, and the best Dividend King bargain on Wall Street.
- It's priced for 1% long-term growth, yet 4% to 7% is what management, analysts, and credit rating agencies expect.
- Even the recent regulatory/legal troubles haven't dinged MO's consensus growth outlook. In fact, it's up modestly since the new broke.
- Buying MO today offers 16% annual consensus total return potential over the next five years, more than 3X that of the S&P 500.
- This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »
We frequently see articles talking about how $10,000 invested into a company X 20 years ago is worth millions today.
This is the great promise of the stock market, the best income and wealth compounding engine ever created.
Fortunes are made by buying right and holding on." - Tom Phelps
It doesn't take a genius, or complex investing strategies to retire rich on Wall Street.
Heck, Anne Scheiber spent 50 years buying and holding nothing but blue-chips and turned $5,000 into $22 million paying $200,000 in annual dividends.
The greatest investors in history have shown that through disciplined financial science, incredible wealth can be generated over time.
Greatest Investors In History: Masters Of Financial Science
| Name | Returns | Time Horizon | Most Famous For |
| Jim Simmons (Co-Founder Renaissance Technologies) | 71.8% CAGR | 1994 to 2014 (best investing record ever recorded) | Pure Quant Based Investing |
| Joel Greenblatt | 40% CAGR | 21 years at Gotham Capital | "Above-Average Quality Companies At Below-Average Prices" |
| Peter Lynch | 29.2% CAGR at Fidelity's Magellan Fund | 1977 to 1990 (13 years) | "Growth At A Reasonable Price" |
| Bill Miller (Legg Mason Value Trust 1990 to 2006) | 22.8% CAGR and beat the S&P 500 for 15 consecutive years | 16 years | |
| Warren Buffett | 20.8% CAGR at Berkshire | 55 Years | Greedy when others are fearful |
| Benjamin Graham | 20% CAGR vs 12% S&P 500 | 1934 to 1956 (22 years) | Margin of Safety |
| Edward Thorp | 20+% CAGR | over 30 years | invented card counting, pure statistically-based investing |
| Charlie Munger | 19.80% | 1962 to 1975 | Wonderful companies at fair prices |
| Howard Marks | 19% CAGR | Since 1995 | Valuation Mean Reversion |
| Anne Scheiber | 18.3% CAGR | 50 years | Turned $5K into $22 million with no formal training, purely with tax-efficient buy and hold blue-chip investing. |
| John Templeton | 300% from 1939 to 1943, 15.8% CAGR from 1954 to 1992 | 38 years | Market Cycles |
| Carl Icahn | 14.6% CAGR vs 5.6% S&P 500 | 2001 to 2016 (15 Years) | |
| David Swenson | 13.9% CAGR at Yale's Endowment (includes bonds and alternative assets) vs 10.7% S&P 500 | 30 years | Alternative Asset Allocation |
| Geraldine Weiss | 11.2% vs 9.8% S&P 500 | 37 years | Best risk-adjusted track record of any newsletter over 30 years according to Hubbert Financial Digest, popularized dividend yield theory (the only strategy she employed) |
While the exact specifics of what each of these investors did to become legends (and often billionaires) vary, there are six common themes that can make anyone with sufficient discretionary savings rich over time.
- prudent portfolio risk management (asset allocation appropriate for your needs)
- safety of your individual companies
- quality of your individual companies
- starting yield
- growth
- valuation
Today I wanted to talk about Altria (NYSE:MO), which is a classic high-yield blue-chip bargain hiding in plain sight. I've invested about $20,000 into Altria over the past year, and continue to opportunistically add whenever the market freaks out over scary headlines.
So let's take a look at the three reasons Altria is set to soar and too cheap to ignore.
Reason 1: World-Class Quality
I always begin a company analysis by looking at safety and quality.
Why?
According to the 2017 study Do Stocks Outperform Treasury Bills? by Hendrik Bessembinder of Arizona State University's W.P. Carey School of Business, 52% of all stocks lose money over time.
This study looked at 26,000 companies from 1926 to 2016 and found that about 12% went to zero.
(Source: Bessembinder et al)
From 1926 to 2016, over 3,000 US companies listed on US exchanges went bankrupt. 1,100, or about 4%, delivered 100% of net positive returns. Just 48% of stocks delivered positive returns.
Basically, focusing on blue-chip quality means minimizing the risk of owning the 52% of stocks that lose money over time.
The Dividend Kings quality scores factor in 143 fundamental metrics covering
- dividend safety
- balance sheet strength
- short and long-term bankruptcy risk
- accounting and corporate fraud risk
- profitability and business model
- cost of capital
- long-term sustainability (ESG scores and trends from MSCI, Morningstar, and Reuters/Refinitiv)
- management quality
- dividend friendly corporate culture/income dependability
- long-term total returns (a Ben Graham sign of quality)
It actually includes over 1,000 metrics if you count everything factored in by eight rating agencies we use to assess fundamental risk.
Dividend Safety
| Rating | Dividend Kings Safety Score (74 Safety Metric Model) | Approximate Dividend Cut Risk (Average Recession) | Approximate Dividend Cut Risk In This Recession |
| 1 (very unsafe) | 0% to 20% | over 4% | 16+% |
| 2 (unsafe average) | 21% to 40% | over 2% | 8% to 16% |
| 3 (average) | 41% to 60% | 2% | 4% to 8% |
| 4 (safe) | 61% to 80% | 1% | 2% to 4% |
| 5 (very safe) | 81% to 100% | 0.5% | 1% to 2% |
| MO | 87% | 0.50% | 1.70% |
Long-Term Dependability
| Company | DK Long-Term Dependability Score | Interpretation | Points |
| S&P 500/Industry Average | 58% | Average Dependability | 2 |
| Non-Dependable Companies | 31% or below | Poor Dependability | 1 |
| Relatively Dependable Companies | 32% to 69% | Below to Above-Average Dependability | 2 |
| Very Dependable Companies | 71% to 80% | Very Dependable | 3 |
| Exceptionally Dependable Companies | 81% or higher | Exceptional Dependability | 4 |
| MO | 85% | Exceptional Dependability | 4 |
Overall Quality
| MO | Final Score | Rating |
| Safety | 87% | 5/5 |
| Business Model | 80% | 3/3 |
| Dependability | 85% | 4/4 |
| Total | 86% | 12/12 (Ultra SWAN) |
Altria Is the 77th Highest Quality Master List Company (Out of 497) = 16th Percentile
(Source: DK Safety & Quality Tool) updated at the end of each day, sorted by overall quality score
MO's 86% quality score means it is the 77th highest quality company on the Master List. This list includes the world's highest quality companies including
- all dividend champions
- all dividend aristocrats
- all dividend kings
- all global aristocrats (such as BTI, ENB, and NVS)
- all 12/12 Ultra SWANs (as close to perfect quality as exists on Wall Street, think wide moat aristocrats)
In other words, among the most elite companies on earth, Altria is in the top 16%, similar in quality to such 10/12 SWANs, 11/12 Super SWANs, and 12/12 Ultra SWANs as
- Alphabet (GOOG)
- Visa (V)
- Automatic Data Processing (ADP) - dividend aristocrat
- Realty Income (O) - dividend aristocrat
- Walmart (WMT)- dividend aristocrat
- Enbridge (ENB) - dividend champion, global dividend aristocrat
- Nike (NKE)
- Berkshire Hathaway (BRK.B)
- Mastercard (MA)
- 3M (MMM) - dividend king
Every one of these 143 fundamental metrics was selected based on
- decades of empirical data
- the experience of the greatest investors in history
- eight rating agencies
- and what blue-chip economists and analyst firms consider most closely correlated to a company's long-term success.
But a purely quantitative model needs to be corroborated by qualitative analysis as well.
No less than Ben Graham, the father of securities analysis considered qualitative factors critical to making prudent long-term investing decisions.
...a satisfactory statistical exhibition is a necessary though by no means a sufficient condition for a favorable decision by the analyst." - Benjamin Graham, Security Analysis (1951 ed.), Page 76
Credit ratings are a good way of judging fundamental risk, especially the risk of losing 100% of your capital over time.
| Rating Agency | Rating | 30-Year Default/Bankruptcy Risk |
| S&P | BBB stable | 7.5% |
| Fitch | BBB stable | 7.5% |
| Moody's | A3 (A- equivalent) | 2.5% |
| DBRS | NA | NA |
| AM Best | NA | NA |
| Consensus | BBB+ stable | 5.83% |
(Sources: S&P, Fitch, Moody's)
Credit ratings are a good way of measuring fundamental risk and can also be an indicator of quality. For example, the average dividend aristocrat has an A- stable credit rating, indicating 2.5% long-term bankruptcy risk.
Altria's consensus credit rating is BBB+ stable, with about a 5.8% 30-year risk of losing all your money investing in this legendary dividend king.
Altria Consensus Balance Sheet Forecast
| Year | Debt/EBITDA (3.0 Or Less Safe) | Net Debt/EBITDA | Interest Coverage (8+ safe) |
| 2020 | 2.52 | 2.10 | 9.63 |
| 2021 | 2.42 | 2.08 | 10.28 |
| 2022 | 2.38 | 1.99 | 10.42 |
| 2023 | 2.34 | 1.90 | 10.94 |
(Source: FactSet Research Terminal)
Altria's strong balance sheet is expected to keep getting stronger over time. That's despite steady dividend increases and $2 billion in near-term buybacks.
Altria Dividend/Payout Ratio/Debt Repayment/Buy Back Potential Forecast
| Year | Dividend Consensus | EPS/Share Consensus | Payout Ratio | Retained Earnings | Buyback Potential | Debt Repayment Potential |
| 2021 | $3.55 | $4.57 | 77.7% | $1,895 | 2.2% | 6.4% |
| 2022 | $3.74 | $4.87 | 76.8% | $2,100 | 2.4% | 7.1% |
| 2023 | $3.99 | $5.16 | 77.3% | $2,174 | 2.5% | 7.2% |
| Total 2021 Through 2023 | $11.28 | $14.60 | 77.3% | $6,169 | 7.1% | 21% |
(Source: FactSet Research Terminal)
Management's dividend policy is to maintain 80% payout ratios over time, and use 20% of earnings to fund buybacks or opportunistic investments. For context, 85% is the safety guideline for this industry, historically associated with little risk of dividend cuts during recessions.
In the next three years, Altria is expected to retain over $6 billion in post-dividend earnings, potentially enough to repay 21% of debt or buy back around 2.5% of its undervalued stock each year.
Altria's buybacks aren't expected to be that aggressive, but they are expected to accelerate noticeably in the coming years.
- 2021 buyback consensus $1.234 billion
- 2022 buyback consensus $1.173 billion
- 2023 buyback consensus $1.064 billion
- 2024 buyback consensus $2 billion
- 2025 buyback consensus $3 billion
- total buyback consensus through 2025: $8.5 billion
Another way of confirming quality is by using Wall Street's favorite approach, historical profitability.
Quality is a proven alpha factor and is determined based on metrics like returns on capital, assets, equity, and overall profitability over time vs industry peers.
(Source: Gurufocus Premium)
Tobacco is a famously lucrative industry, with returns on capital 5X to 6X those of most industries.
Altria Is The 9th Most Profitable Tobacco Company In The World Over The Past Year
| Metric | Industry Percentile | Major Tobacco Companies More Profitable Than MO (Out of 42) |
| Operating Margin | 95.00 | 2 |
| Net Margin | 68.29 | 13 |
| Return On Equity | 91.43 | 4 |
| Return On Assets | 52.38 | 20 |
| Return On Capital | 92.86 | 3 |
| Average | 79.99 | 8 |
(Source: Gurufocus Premium)
Altria's profitability is in the top 20% of its peers, and that profitability is relatively stable over time.
Altria's profitability took a hit after the Juul investment, which was $13 billion. That's been written off to $1.5 billion, the biggest mistake this company has ever made.
But profitability has rebounded back to historical levels in recent quarters. And note that free cash flow margins are still mouthwatering at almost 40%.
Free cash flow is ultimately what pays dividends and funds buybacks and MO's FCF margins have been steadily improving over time. That includes falling cigarette volumes, rising tobacco taxes, and all manner of increased regulations.
This brings us to the 2nd reason I'm so bullish on Altria, enough to invest $20,000 into this legendary dividend king in the past year alone.
Reason 2: A Long Growth Runway That Has Nothing To Do With Cigarettes
Recently Altria plunged 10% in two days on news of stricter tobacco regulations.
Tobacco stocks are lower after the Biden administration is said to be considering requiring tobacco companies to lower the nicotine levels of all cigarettes sold in the U.S. to a level at which they are no longer classified as addictive.
The nicotine-reduction policy being considered would lower the chemical in cigarettes to nonaddictive or minimally addictive levels in a bid to push smokers to either quit or switch to lower-nicotine alternatives such as nicotine gums, lozenges or e-cigarettes. In addition, a menthol ban under consideration would target smoking in younger people, many of whom start with menthol, according to The Wall Street Journal.
The changes were largely anticipated to be announced at some point during the Biden Administration. A long stretch of legal challenges to any dramatic regulations is also expected." - Seeking Alpha
As I, Morningstar, and all analysts have pointed out for years, such headline risk is par for the course in this industry.
The introduction of such measures does not form our base-case assumption for the purposes of forecasting cash flows, but it is one of the ESG risks we have identified and is captured in our bear-case valuations.
There is little evidence to suggest the change in administration has increased the probability of these events occurring, so we maintain our valuations and wide moat and negative trend ratings for the cigarette makers with exposure to the U.S. cigarette market: Altria, British American Tobacco, and Imperial Brands.
Negative headlines such as this have spooked investors since 2017, and the tobacco group is undervalued relative to our estimate of intrinsic value." - Morningstar
Similarly, litigation risk is something that all tobacco investors have dealt with for decades.
A judge has signaled in a tentative ruling that Altria and Juul Labs (JUUL) are likely to face a proposed antitrust class action suit seeking to unwind a $12.8B deal that gave Altria a 35% stake in the troubled vaping company.
Unwinding the deal would be complicated and the case could extend for years.
Last week, Juul landing back in the legal crosshairs again with RICO charges being resurrected when a judge in San Francisco allowed a suit from consumers and local government to be resubmitted.
On the positive side for the tobacco company, the news on Altria wasn't bad enough to move Bank of America off its Buy rating." - Seeking Alpha
Even if this lawsuit resulted in Altria losing its Juul investment, that investment wasn't expected to pay cash flow dividends for many years. It had nothing to do with MO's safe dividend thesis.
The threat of a menthol ban has been an overhang for many years, and nicotine level reductions were mooted by hawkish FDA commissioner Scott Gottlieb in 2017.
The menthol category represented 29% of the total U.S. market by volume in 2019, according to Euromonitor. Nicotine is in itself of limited harm if consumed in moderate quantities, but as the addictive substance in cigarettes, it suppresses the cessation rate. If it were to be limited in cigarettes to minimally or even non-addictive levels, the secular decline rate on cigarette volumes could accelerate."- Morningstar
The NYT and Washington Post are now reporting that the Biden Administration will be moving forward with a US menthol ban, though it doesn't appear to target vaping or heat sticks.
The reduction in nicotine also appears to be likely, though we'll have to see whether it applies to reduced-risk products or RRPs.
May accelerate the shift to smoke-free nicotine; MO prepared
These initial questions (and likely more) need to be addressed before we can gauge the impact on MO’s business. If IQOS HeatSticks are excluded, and we believe that it may well be given the March 2018 Advance Notice of Proposed Rulemaking classified cigarettes as “combustible cigarettes”, then this rule (if ultimately implemented) could accelerate the shift to oral tobacco and heated tobacco faster than anticipated." - Bank of America (emphasis added)
Bank of America expects that nicotine regulations won't target RRPs, which is the cornerstone of the industry's pivot to a smoke-free future.
The FDA’s plan for tobacco and nicotine regulation was said to serve as a multi-year roadmap to better protect kids and significantly reduce tobacco-related disease and death...
Any menthol fight will likely be a lengthy one, as the FDA is supposed to “follow the science” in order to ban menthol, which the industry still believes lacks scientific evidence.
If the FDA decides to pursue the banning of menthol in cigarettes, we would anticipate any such regulatory process to take at minimum two years, likely several more, given the anticipated rulemaking process and expected lawsuits by the manufacturers and/or other interested parties.
Further, the implementation of such a law would likely take even longer and could include a multi-year phasing out of menthol (similar to the process taken in the EU). - Bank of America (emphasis added)
Bank of America also agrees with BTI's previous assessment that any menthol ban would take many years, five to seven in fact, before being implemented.
(Source: earnings presentation)
Altria has always had a plan to transition to a smoke-free RRP/cannabis future.
We are off to a strong start to the year and believe our businesses are on track to deliver against full-year plans. Against a challenging comparison, our tobacco businesses performed well in the first quarter and we continued to make progress advancing our non-combustible portfolio." - CEO
The company, after posting solid earnings, reiterated its 2021 guidance. That guidance is the basis for the consensus medium-term growth forecast from analysts.
| Metric | 2020 Actual Growth | 2021 consensus growth | 2022 consensus growth | 2023 consensus growth | 2024 consensus growth | 2025 consensus growth |
| Dividend | 4% | 4% | 5% | 7% | NA | NA |
| EPS | 3% | 5% | 7% | 6% | 3% | 6% |
| Operating Cash Flow | 8% | 1% | -1% | 2% | NA | NA |
| Owner earnings | 3% | 2% | NA | NA | NA | NA |
| EBITDA | 5% | 7% | 4% | 3% | NA | NA |
| EBIT (operating profit) | 5% | 7% | 3% | 3% | NA | NA |
(Source: F.A.S.T. Graphs, FactSet Research)
Altria hasn't posted a year of negative growth since 2003 (-2%). In 2020, when the S&P 500 reported -15% EPS growth, Altria's EPS grew 3%. And that modest but steady growth is expected to continue through at least 2025.
The dividend is also expected to track earnings and cash flow higher, hitting a 54-year dividend growth streak in 2023.
Over the longer term, analysts remain relatively bullish on MO's prospects.
(Source: FactSet Research Terminal)
We've now had several weeks in which analysts have had time to adjust their growth estimates based on the regulatory news.
In fact, before the news, the median FactSet growth consensus was 5.6%. Now it's 5.8%. In other words, according to analysts, the recent news hasn't hurt MO's growth outlook at all.
(Source: Yahoo Finance, Reuters/Refinitiv) 14 out of 18 analysts
No one is claiming that Altria is a growth stock. The growth consensus range is 4.7% to 6.0%. That's similar to management's pre-pandemic 5% to 7% growth guidance.
- Morningstar growth estimate 4% to 6%
- Fitch growth forecast 7%
(Source: FactSet Research Terminal)
Altria is currently trading at 10.4X forward earnings. According to the Graham/Dodd fair value formula that prices in about 1% growth forever.
Reasonable people can disagree with how fast Altria is likely to grow. But the 24 analysts/rating agencies that collectively know MO's business better than anyone other than management are confident that MO will grow a lot faster than 1%.
This is a business that management and analysts know very well. That's why other than the pandemic year of 2020, MO hasn't missed expectations in over a decade. In fact, over 20 years, outside of modest 10% margins of error, MO always grows as expected.
In other words, Altria is a classic example of the market mispricing risk and likely growth. And that is where our opportunity lies.
Reason 3: The Best Dividend King Bargain On Wall Street
(Source: F.A.S.T. Graphs, FactSet Research)
Outside of bear markets and bubbles, hundreds of millions of investors over 20 years have determined that 14X to 16X earnings is the market-determined intrinsic value for Altria.
That happens to be the Graham/Dodd rule of thumb for companies growing between 3.25% and 15% over time. Which includes MO's growth consensus range.
In other words, as long as Altria grows as expected, there is a 91% probability its PE keeps reverting back to its historical fair value range over time.
According to John Templeton, and Howard Marks, two of the greatest investors in history, about 20% of the time "this time really is different" for individual companies or industries.
Could these regulations slow tobacco growth below expected levels? Sure. Is that the high probability/base case scenario? Not according to 24 analysts and rating agencies.
| Metric | Historical Fair Value Multiples (all-years) | 2020 | 2021 | 2022 | 2023 |
| 5-Year Average Yield | 5.26% | $65.40 | $67.49 | $71.10 | $75.86 |
| 13-Year Median Yield | 4.96% | $69.35 | $71.57 | $75.40 | $80.44 |
| 25-year average yield | 5.32% | $64.66 | $66.73 | $70.30 | $75.00 |
| Earnings | 14.2 | $61.74 | $64.71 | $69.03 | $73.35 |
| Operating Cash Flow | 14.5 | $65.30 | $65.81 | $64.91 | $66.15 |
| EBITDA | 8.7 | $52.83 | $56.64 | $58.68 | $60.18 |
| EBIT (operating income) | 9.1 | $54.03 | $58.07 | $59.78 | $61.56 |
| Average | $61.34 | $64.04 | $66.53 | $69.61 | |
| Current Price | $48.03 | ||||
Discount To Fair Value | 22% | 25% | 28% | 31% | |
Upside To Fair Value (Not Including Dividends) | 28% | 33% | 39% | 45% |
(Source: F.A.S.T. Graphs, FactSet Research)
Altria is about 25% historically undervalued, making it a potentially very strong buy for anyone comfortable with the risk profile.
| Rating | Margin Of Safety For Speculative Blue-Chip Quality Companies | 2020 Price | 2021 Price | 2022 Price |
| Potentially Reasonable Buy | 0% | $61.34 | $64.04 | $66.53 |
| Potentially Good Buy | 5% | $58.27 | $60.84 | $63.21 |
| Potentially Strong Buy | 15% | $52.14 | $54.44 | $56.55 |
| Potentially Very Strong Buy | 25% | $46.00 | $48.03 | $49.90 |
| Potentially Ultra-Value Buy | 35% | $39.87 | $41.63 | $43.25 |
| Currently | $47.96 | 22% | 25% | 28% |
Upside To Fair Value (Not Including Dividends) | 28% | 34% | 39% |
(Source: F.A.S.T. Graphs, FactSet Research)
Total Return Potential
Here is a reasonable idea of what kind of returns you can expect buying MO today.
Altria 2023 Consensus Return Potential
(Source: F.A.S.T Graphs, FactSet Research)
If MO grows as analysts expect through 2023 (and it historically almost always does), and returns to its short historical fair value, then analysts expect
- 75% total returns
- 23.2% CAGR returns
- vs -0.8% CAGR S&P 500
Using the low end of MO's historical fair value, which would be absolutely justified by a 4% to 7% consensus growth range, MO has the ability to deliver Buffett-like returns over the next three years.
In fact, at its approximate 25% discount, it has the potential to outperform the 37% overvalued S&P 500 by 77% over the next three years.
(Source: F.A.S.T. Graphs, FactSet Research)
Earnings growth estimates are rising by the day. Yet the market has already priced in three years of earnings growth totaling 62% or 17.4% CAGR.
Over the long term, MO's return outlook is also exceptional.
Altria 2026 Consensus Return Potential
(Source: F.A.S.T. Graphs, FactSet Research)
If MO grows as analysts expect through 2026 and returns to historical fair value you could expect
- 136% total returns
- 16.3% CAGR
- vs 4.8% CAGR S&P 500
- More than 3X better than the market's consensus return potential
- from a modestly growing blue-chip bargain hiding in plain sight
Cathie Wood at ARK and private equity strive to achieve 15% annual returns. Altria can deliver that with far less valuation and fundamental risk.
(Source: F.A.S.T. Graphs, FactSet Research)
Over the long term, analysts expect
- 7.2% yield + 5.8% growth = 13.0% CAGR very long-term total returns (after valuation changes cancel out)
- 11.2% to 14.2% CAGR range
- management guidance 12.2% to 14.2% CAGR
- vs 7.8% for the S&P and 10.8% for the dividend aristocrats
Altria Total Returns Since 1986
(Source: Portfolio Visualizer)
Altria growing at 8% over time delivered almost 18% annual total returns since 1986.
$1 became $131 adjusted for inflation. $1 invested 35 years ago is now paying over $21 in annual dividends, which is continuing to grow every year.
Today MO is expected to grow 2% slower than it has in the past. So rather than 16% to 17% annual returns, it is expected to deliver about 13% to 14%.
That's still remarkable, and on par with the greatest investors in history.
Altria Vs S&P 500 Vs Dividend Aristocrat Inflation-Adjusted Total Return Forecast: $1,000 Initial Investment
| Time Frame (Years) | 5.8% LT Inflation-Adjusted Returns (S&P Consensus) | 8.8% Inflation-Adjusted Returns (aristocrat consensus) | 11.0% Inflation-Adjusted Returns (MO consensus) |
| 5 | $1,325.65 | $1,524.56 | $1,685.06 |
| 10 | $1,757.34 | $2,324.28 | $2,839.42 |
| 15 | $2,329.62 | $3,543.51 | $4,784.59 |
| 20 | $3,088.26 | $5,402.29 | $8,062.31 |
| 25 | $4,093.94 | $8,236.11 | $13,585.46 |
| 30 | $5,427.13 | $12,556.45 | $22,892.30 |
| 35 | $7,194.46 | $19,143.06 | $38,574.85 |
| 40 | $9,537.33 | $29,184.74 | $65,000.87 |
| 45 | $12,643.14 | $44,493.88 | $109,530.24 |
| 50 | $16,760.36 | $67,833.58 | $184,564.83 |
Over time, Altria's significantly better return potential than the S&P 500 and dividend aristocrats could turn $1,000 into a small fortune.
In fact, if MO achieves its smoke-free plans, and grows as expected for 50 years, then $1 invested today would be generating about $9.71 in annual dividends, adjusted for inflation.
If you're looking for generous, dependable, and steadily rising income, they don't come much better than Altria.
My personal investment in Altria could eventually be paying me $195,000 in inflation-adjusted dividends.
That's similar to the $200,000 per year that Anne Scheiber was getting from her $5,000 investment in 1945 when she died worth $22 million in 1995.
Risk Profile: Why Altria Isn't Right For Everyone
There are no risk-free companies and before you buy any stock you need to be comfortable with the fundamental risk profile.
Fundamental Risk Summary
Investors in tobacco companies should have the stomach for fat-tail risk, particularly those holding shares in a single-market pure-play like Altria. Overall, we believe the risk of a significant adverse event is lower than it was one or two decades ago, but the shifting sands of regulation have created some new risks to Altria's business model in recent years and we have raised our uncertainty rating to medium from low.
Litigation risk still remains, but adverse judgments have been manageable recently. While it is almost impossible to forecast the magnitude of any awards against the tobacco industry, we expect payouts to be within Altria's annual free cash flow.
The FDA regulates the tobacco industry in the U.S. The recent ban on flavored nicotine liquids demonstrates the FDA is willing to take significant steps to prevent the uptake of nicotine products by new consumers. The agency intends to ban the use of menthol in cigarettes in the U.S., but we think the impact of such a step will be limited.
Regulatory risks remain in the core cigarette business as well, including a potential clampdown on the use of menthol and an enforced reduction of the level of nicotine in cigarettes. The menthol category has had the sword of Damocles hanging over it for several years, with no restrictive access yet coming to fruition.
The FDA did not take the opportunity to curb the use of menthol when it abolished other flavors in cigarettes in 2009, and we still view the risk to the menthol category as limited. The potential for limits on the nicotine levels in cigarettes is a relatively new risk, however, with the FDA announcing in the summer of 2017 that it will investigate the potential for nicotine control. We do not believe such controls are a foregone conclusion, however, because it could have unforeseen consequences such as increasing cigarette volumes.
The introduction of plain packaging would be detrimental to Altria's wide economic moat and remains a low probability risk." - Morningstar
The tobacco industry's risk profile is more complex than many people are comfortable with. If you're one of those people, then you shouldn't own any tobacco company, period.
How do we measure and track such complex risk profiles?
- 18 analysts
- 3 credit rating agencies
- 6 total risk rating agencies
- 24 expert consensus lets us know whether the thesis has weakened, strengthened, or shattered entirely
If you want to understand a company's complete risk profile, that's where ESG risk scores and trends come in.
ESG Material Financial Risk Analysis
Essential To Fully Understanding A Company's Overall Risk Profile, Especially Tobacco Companies
According to the world's best risk assessors, ESG metrics are a critical component of a company's overall risk profile. Here's who considers ESG important and builds it into their safety models and ratings.
BlackRock - #1 asset manager in the world
MSCI - #1 indexing giant
Morningstar
Reuters/Refinitiv
ISS (Institutional Shareholder Services) - #1 corporate proxy firm on earth
S&P
Fitch
Moody's
DBRS (Canadian credit rating agency)
AM Best (insurance industry rating agency)
Bank of America- one of the 16 most accurate economic/analyst teams in the world, according to Market Watch
Bloomberg
FactSet Research
- State Street - one of the largest custodial banks on earth
- Wells Fargo - one of the 16 most accurate economic/analyst teams in the world, according to Market Watch
- NAREIT
Companies with strong ESG profiles may be better positioned for future challenges and experience fewer instances of bribery, corruption, and fraud." - MSCI (Emphasis added)
Bank of America's research finds that ESG metrics also help improve the long-term profitability and outcomes at companies.
Punchline: higher ROE, lower risk & lower cost of capital
We find that companies with greater gender diversity at the board/management level typically see higher ROE and lower earnings risk than peers.
Moreover, based on disclosure data from ICE, we find gender diversity in management is associated with a ~20% premium on P/E on an overall and sector-neutral basis.
Ethnic and racial workforce diversity shows similarly strong results: higher ROE, lower risk, and significant premia on P/E and P/BV." - Bank of America (emphasis original)
ESG isn't about political correctness, it's about sound business practices and maximizing long-term profits by avoiding blowing up companies by chasing dangerous short to medium-term profits.
Altria Consensus ESG Risk Rating
| Rating Agency | Industry Percentile | Rating Agency Classification |
| MSCI | 42.0% | BB Below-Average |
| Morningstar/Sustainalytics | 88.8% | 25.3/100 Medium Risk |
| Reuters/Refinitiv (Combined ESG Rating) | 98.5% | Excellent |
| S&P | 37.0% | Below-Average |
| Consensus | 66.6% | Above-Average |
(Sources: MSCI, Morningstar, Reuters/Refinitiv, S&P)
According to MSCI, Morningstar, Reuters, and S&P, Atria's management of its ESG risk is above average, in the 67th industry percentile. A modest improvement to the 70th percentile would earn MO a spot in the DK strong ESG watchlist.
Morningstar rates almost 14,000 global companies for how well they managed ESG financial risk. MO is the 2nd best among tobacco companies and in the 40th percentile among all rated companies.
(Source: Reuters/Refinitiv)
Reuters considers MO's ESG risk management to be excellent. In fact, just four tobacco/food companies do it better out of 330 it rates.
Of course, the trouble with ESG risk ratings is that there is just a 61% correlation between them, unlike credit ratings where the correlation is 99%.
That's because unlike credit ratings, where we have over 100 years of default data to use to generate safety models, there is no gold standard ESG risk model.
Morningstar's model uses up to 20 metrics.
MSCI's uses up to 37 metrics.
Reuters model uses over 500 metrics.
S&P's uses over 1,000 metrics.
(Source: MSCI)
(Source: S&P)
Dividend Kings doesn't ignore any fundamental data that studies indicate is important to long-term success.
We incorporate credit and ESG risk ratings from up to eight rating agencies, as well as their ESG risk rating trends.
The goal is simple. When dealing with highly complex risk profiles, you trust the expert consensus, incorporating all the ratings, trends, and consensus growth estimates, good, bad, and ugly.
While any individual expert can be wrong, the chances that all 24 analysts and rating agencies will completely miss the boat about MO's thesis breaking is very small.
It's not zero of course, but investing is all about making reasonable and prudent low-risk/high-probability decisions.
Bottom Line: Altria Is Set To Soar And Too Cheap To Ignore
Altria is up 65% off the pandemic lows. But it remains 25% undervalued, and the best bargain among the dividend kings.
Regulatory and legal risks are nothing new in this industry. For over 50 years, tobacco blue-chips like Altria have been delivering sensational total returns and mind-blowing income compounding. Not because bad ever happened, but because they successfully adapted to a lot of bad things always happening.
By no means are tobacco blue-chips like Altria right for everyone. No company is. But if you're comfortable with the risk profile, then a 25% margin of safety, and very safe 7.2% yield means Altria is well worth considering today.
I've personally invested about $20,000 into this legendary dividend king. And if management, analysts, and rating agencies are right, and Altria successful transitions to a smoke-free future, then one day I might be able to retire off a fraction of my Altria dividends alone.
Even if your savings are smaller than mine, the principles of disciplined financial science and successful long-term income growth investing, never change.
- prudent portfolio risk management (asset allocation appropriate for your needs)
- safety of your individual companies
- quality of your individual companies
- starting yield
- growth
- valuation
As long as intrinsic value is a function of long-term fundamentals, these will always be the six principles that determine whether you retire in comfort, splendor, or not at all.
I can't predict where Altria will go in the next month, quarter, or even year. But I can tell you that the best available facts say that anyone buying Altria today is likely to be very happy in 5+ years.
The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.” - Warren Buffett
If you've ever wanted to take charge of your financial destiny, if you're tired of praying for luck on Wall Street and want to start making your own, then Altria at today's 25% margin of safety is a great way to do just that.
With a very safe 7.2% yield, and modest 4% to 7% growth expected over the long term, Altria can not only pay the bills today but is likely to keep delivering its historically market and aristocrat smashing returns far into the future.
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This article was written by
Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).
I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.
My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.
With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.
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.
Dividend Kings owns MO in our portfolios.
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.