- Altria Group has a dividend yield of more than 8% that it can comfortably afford with its earnings.
- The company is working to rapidly expand its smokeless portfolio, which will form a strong basis of its future volumes, with higher margins.
- We expect the company will continue growing its EPS and dividends to increase shareholder returns but would like to see increased diversification.
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Altria Group, Inc. (NYSE:MO) is one of the largest tobacco companies in the world. Despite consistent warnings about cigarettes, the company has managed to consistently improve its assets and cash flow. As we'll see throughout this article, the company's profits and shareholder return potential make it a valuable long-term investment.
Altria has continued to have strong headline financials, showing its strength.
Altria Group, Inc. saw diluted EPS drop 7.4% YoY, with some volatility. However, the company's adjusted EPS increased by 5.4% YoY to $1.18. That's in line with the company's long-term guidance. It also shows how cheap the company is currently, putting it firmly in the category of a single-digit P/E. The EPS is enough to comfortably cover its $0.94/share dividend.
The company's financials also helps to highlight the strength of the company's business.
Altria's Cash Returns
The company has focused on continuing to return cash to shareholders with its impressive assets and cash flow.
The company retired $1.3 billion of outstanding debt. We'd like to see the company continue retiring debt as it comes due to higher interest rates and the company's relatively high debt load. The company's NJOY transaction, which cost $2.75 billion, and which we'll discuss in more detail below, meant it didn't repurchase shares.
However, the company still has $1 billion in remaining share repurchases, roughly 1.25% of its market cap. At its current dividend yield, repurchasing shares is very profitable, and we'd like to see the company ramp this up. We believe it can hold off on acquisitions.
Altria's Smokeless Transactions
The company has worked to expand its smokeless portfolio to align with its long-term goals.
The company's NJOY acquisition will cost the company $2.75 billion in cash and up to another $500 million. The company is paying it in cash, with no equity issued. The transaction is still going through approvals, although we expect it to close. The company has also completely exited its JUUL investment in exchange for certain smokeless tobacco assets.
It's the best that the company could do with what's left, and we think it's the right call for the right time. It'll enable the company to expand its smokeless portfolio without having to deal with the negatives that came from Juul. However, there's no denying, largely from regulatory issues, that the company threw away more than $10 billion on Juul.
Altria's 2028 Targets
The company has announced a new set of 2028 targets.
The company is targeting mid-single-digit adjusted EPS growth compounded through 2028. The company's adjusted EPS target remains roughly $5.06/share, which gives the company a P/E of ~9, a strong indication of the company's financial strength. Assuming the company continues 5% growth, it can hit an EPS of $6.5/share.
Altria Group, Inc. is also targeting a similar growth in dividend yield. The company's current dividend is just under 8.4%, which would push the yield for those who invest today to 10.7%. The company plans to maintain a low debt to earnings ratio and maintain at least a 60% adjusted OCI margin. For long-term potential, the company is growing volumes which will support returns.
The largest risk to our thesis is Altria's lack of diversification and an increased regulatory burden through higher taxes on tobacco as a "sin" product. The company still has minimal diversification, and smokeless products aren't full diversification. That could hurt the company's ability to continue driving double-digit returns.
Altria Group, Inc. has a strong portfolio of assets. It has a single-digit P/E, and it has used its cash flow to generate a more than 8% dividend yield. The company's target for 35% growth in smoke-free volumes, which will push volumes to roughly 1.1 billion units, will help with some diversification. However, it's still minimal versus the company's 75 billion units in traditional product sales.
At the same time, Altria Group, Inc. doesn't represent perfect diversification. We'd like to see other diversification for the company's businesses. The company's targets for mid-single-digit earnings and dividends growth, along with continued share buybacks, will enable increased Altria Group, Inc. shareholder returns. Let us know your thoughts in the comments below.
This article was written by
The Value Portfolio specializes in building retirement portfolios and utilizes a fact-based research strategy to identify investments. This includes extensive readings of 10Ks, analyst commentary, market reports, and investor presentations. He invests real money in the stocks he recommends.He is the leader of the investing group The Retirement Forum with features including: model portfolios, macro overviews, in-depth company analysis and retirement planning information. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MO either through stock ownership, options, or other derivatives. 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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