Altria: This Tobacco Industry Titan Is On Sale Right Now
The tobacco industry has produced above-average total returns for many decades, despite the fact that smoking rates have been declining since the 1970s. Altria (ticker: MO), which sells famous brands such as Marlboro, has been the best-performing S&P 500 stock over a 50-year span, according to Jeremy Siegel.
Altria’s share price has declined significantly over the last couple of months, which means that shares are on sale right now. For total return oriented investors, as well as for those that are looking for a high-yielding income stock, Altria looks like an attractive investment right here.
Company Overview
Altria’s most important business, by revenue generation as well as by earnings contribution, is selling cigarettes. The company is active in other markets on top of that, though, including smokeless tobacco, cigars, wine, and beer (through Altria’s equity stake in global beer giant Anheuser-Busch InBev (ticker: BUD)).
Altria has reported its third quarter earnings results on October 25. The company was able to generate sales of $5.3 billion during the quarter, which represents an increase of 3.3% year over year. Cigarette shipment volumes were down compared to the prior year’s quarter, but a substantial increase in average selling prices easily made up for the volume decline and allowed for some revenue gains on top of that. Profits totaled $1.08 on a per-share level, and Altria continues to expect earnings-per-share of $3.99 for fiscal 2018.
Growth Prospects
If one does not know anything about the performance of tobacco stocks, one could imagine that they would be a weak investment, as smoking rates in the US (the only market Altria sells its cigarettes in) have peaked in the 1970s. Cigarette volumes are declining, but since customers are not price-sensitive, Altria can increase the price per cigarette regularly. As long as the price per cigarette grows at a faster pace than the smoking rate declines, Altria is able to grow its revenues. The price increases do allow for rising gross and operating margins on top of that, which is why tobacco companies such as Altria have generated highly compelling earnings growth rates in the past.
Going forward Altria should be able to generate some earnings growth with its legacy cigarette business, but there are other factors at play on top of that. Altria is thinking about entering the cannabis industry (through cooperation with Aphria), Altria is in talks with JUUL Labs (the market leader in e-cigarettes), and Altria awaits approval for the reduced-risk product iQOS in the US, which the company will license from Philip Morris (ticker: PM). Through this multitude of factors, coupled with share repurchases, Altria should be able to maintain a solid earnings growth rate over the coming years.
Valuation, Dividends, and Expected Total Returns
Based on management’s forecast for earnings-per-share of ~$3.99 during fiscal 2018, Altria’s shares are valued at less than 14 times this year’s earnings right now. Relative to Altria’s median earnings multiple of 16.2 over the last decade shares thus look quite inexpensive at the current price.
Altria’s share price has gotten under pressure due to worries about menthol legalization changing during the next couple of years. It is not yet known whether menthol cigarette sales will actually get banned, and if so, at what time. In the meantime, the pressure on Altria’s share price has made Altria’s dividend yield rise to 5.9%, the highest level in years.
With a dividend yield that is this high, not a lot of share price gains are needed for Altria to produce compelling total returns. Through some earnings growth and multiple normalization Altria will likely be able to generate annual share price gains in the high single digits going forward, which means that total returns will likely be somewhere in the low-teens region.
Final Thoughts
Altria has been a very strong investment in the past, and it looks like total returns over the coming years will be attractive as well. The company’s yield is roughly three times as high as that of the broad market, and through a multitude of growth vectors and some multiple expansion it is likely that Altria will produce meaningful share price gains over the coming years as well.
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