Tobacco giant Altria Group (MO -0.67%) has a long history of treating shareholders well. Between huge share-price gains and reliable income for its investors, Altria has thus far successfully navigated substantial obstacles. Now, Altria faces a new challenge in the form of regulatory threats, and some investors wonder whether it can do as well addressing outstanding issues as it has in the past.
It's smart when evaluating a stock to look at key measures such as the underlying company's growth prospects and financial condition, along with current valuation and dividend payouts. Below, we'll take a closer look at Altria Group to see whether it has what it takes to justify purchasing shares right now.
Altria's sales growth has been tepid in recent years. Average annual gains in revenue over the past five years have amounted to just 2.2%, and sales increases slowed to just 0.8% in 2017.
Altria faces a continual balancing act when it comes to revenue. On one hand, falling cigarette volumes show the long-term trend away from smoking that has prevailed for decades. Yet Altria works hard to offset lost volume by using its pricing power, and that's been a big part of the company's success in maintaining profitability. With healthy net margin levels, Altria has been able to make more from less in terms of sales growth. That might not be sustainable in the long run, but it's worked longer than many previously believed possible.
A big concern is the recent move from the U.S. Food and Drug Administration seeking to impose tight limits on nicotine levels in cigarettes. That could spell disaster for cigarette sales, making it even more important for Altria to emphasize the other parts of its business. That would include both alternative products sales like e-cigarettes as well as the potential introduction of the iQOS heated-tobacco system if it can gain FDA approval. Investors have to keep that threat in mind as they evaluate Altria's future prospects.
Altria makes use of its access to capital markets, but it does so prudently. Debt levels have remained relatively constant during the 2010s, and although its current debt-to-equity ratio of about 90% isn't the lowest it could be, it's not high enough to represent any cause for alarm.
The company has handled its finances expeditiously even in evaluating major opportunities. For instance, the purchase of SABMiller by Anheuser-Busch InBev (BUD -3.48%) gave Altria an opportunity to decide how to handle its investment in the beer industry. It responded by boosting its stake in Anheuser-Busch, spending some of the cash it received in the deal in order to achieve a stake of more than 10% in the beer giant. With plenty of cash flow, Altria has the luxury to be able to make big strategic moves like that without straining its capital structure.
Altria has a relatively high valuation, although most consumer-oriented stocks share elevated stock prices right now. Its trailing price-to-earnings ratio of about 19 on a normalized basis is roughly in line with the broader market, despite the fact that some would note that relatively slow growth prospects might make Altria less suited to a premium valuation.
However, Altria is looking cheaper now than it has for a while. Throughout the past several years, the stock has seen normalized multiples in the mid-20s. By that measure, Altria is its most attractive since 2014, although it's far from its historical lows as far as typical valuations are concerned.
Dividends are a strong suit for Altria, with half a century of dividend-raising history behind it. The stock has a current yield of 4.6%, which is well over twice what the overall stock market offers.
Altria has also consistently boosted its payouts year in and year out. Over the past five years, typical dividend increases have averaged about 8% annually, including a 6% increase earlier this year. As long as Altria retains its pricing power and can keep profits growing substantially, the tobacco giant should have the power to keep boosting its dividend payments at an attractive rate.
Overall, Altria isn't a screaming buy right now, especially given the regulatory questions it faces. Yet it's moving in the right direction toward becoming more promising, and that means that investors should keep an eye on it to see if it can make a clearer positive move in the months and years ahead.