What happened
Shares of Altria (MO 0.40%) were moving higher last month as the Marlboro-maker benefited from a rotation out of growth stocks and into value stocks and dividend stocks. Rising interest rates also seemed to encourage that rotation, favoring high-yielding dividend stocks like Altria.
As a tobacco company, Altria is a recession-proof stock since consumers buy cigarettes regardless of the state of the economy. But the stock has struggled for most of the pandemic as investors focused their attention on surging growth stocks in areas like cloud computing and e-commerce. That seems to be changing now.
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According to data from S&P Global Market Intelligence, the stock finished the month up 17% although there was little news out on Altria. As you can see from the chart below, the gains were steady over most of the month.
So what
Rising interest rates were the main force that seemed to drive the rotation, as the 10-year Treasury yield rose from 1.45% to 1.76%. That leads investors to raise discount rates in their models, encouraging them to move out of growth stocks, which offer little near-term profits, and into stocks like Altria that are highly profitable and offer a generous dividend. Currently, the stock pays a dividend yield of 6.8%, and its yield was 8% at the beginning of the month.
There was some analyst chatter on Altria during March. On March 16, Citigroup downgraded the stock from buy to neutral. Analyst Adam Spielman predicted the last U.S. smoker would quit by 2050, a challenge for Altria as the vast majority of its business still comes from cigarettes. Three days later, Deutsche Bank raised its price target on the stock from $52 to $54, maintaining a buy rating, and on March 26, Jefferies upgraded the stock to buy and raised its price target to $58 from $40. Analyst Owen Bennett said the company's exposure to cannabis and next-gen products like vaporizers was being underappreciated, and the stock rose nearly 5% on that upgrade.
Now what
With last month's gains, Altria stock is now up 24% year to date, but its upside potential may be more limited. This is still a slow-growth stock in a declining industry that has struggled with recent attempts to diversify, having had to write down its stake in both Juul Labs and Cronos Group. Nonetheless, for dividend investors it's hard to beat Altria's yield, reliability, and track record of growth, and with its commitment to paying out 80% of its profits as dividends, management has made it clear that most of the reward in owning the stock comes from the dividend.
