If I could describe the first half of 2023, I would say it reminds me of a jam-packed sandwich -- hear me out.
The Federal Reserve has raised interest rates to their highest levels in nearly two decades, and economists can't seem to come to a consensus around whether the economy is headed toward recession. And yet with all the hoopla, Big Tech stocks have witnessed a euphoric rise, thanks in large part to Wall Street's new favorite buzzword: artificial intelligence (AI). If you don't believe me, consider the Nasdaq's year-to-date return of more than 30%.
As I've written about previously, when there is such a murky picture surrounding the broader economy, I tend to lean toward a more conservative investment approach. More specifically, allocating capital to blue chip stocks as opposed to high-flying, albeit volatile, names could be a worthwhile effort. Additionally, identifying companies that consistently reward shareholders in the form of buybacks and dividends can help capital preservation.
To that end, here is an in-depth analysis of Altria (MO -0.37%), a market leader in the tobacco industry.
Some notable market trends to be aware of
Altria's portfolio includes the cigarette brand Marlboro and nicotine companies on! and Skoal.
Per the company's latest investor presentation, domestic cigarette volumes were estimated to be down 7.5% at the industry level during the second quarter. To put this into broader context, data suggests that cigarette volumes have hovered around declining rates of between 8% and 9% over the last year. Given this analysis, investors should not be surprised to learn that Altria's revenue through the first half of 2023 is down 1.7% year over year.
During the earnings call, management attributed these declines to factors such as inflation and gas prices. It's important for investors to keep in mind that even though inflation is cooling, it still remains higher than the Fed's long-term 2% target. In fact, during a summit this week, Fed Chairman Jerome Powell reiterated that 2% "is and will remain our inflation target," signaling that there is still work to be done.
Image source: Getty Images.
Management's plan for growth
As a consumer discretionary stock, it is important that Altria's management outline a long-term path for growth to persuade uninspired investors who may be disillusioned by the current challenges the company faces.
One of the bigger areas of focus during the earnings call was management's commentary around Altria's latest acquisition. On June 1, the company closed a $2.75 billion deal to buy NJOY Holdings, a developer of electronic cigarettes and vaping products. Following the transaction, Altria highlighted an aggressive growth plan revolving around bolstered distribution. By the end of the third quarter, management believes NJOY products will be in 43,000 stores, and it expects products to be in a total of 70,000 by year-end.
Although the prospect of new products is exciting, it is likely too early for investors to know how accretive the deal will be. Although I applaud management for identifying a new target and swiftly tucking a new brand into its portfolio during a rather cloudy economic picture, there are other reasons to be encouraged.
A long history of shareholder rewards
After the earnings call, management declared a 4% increase in Altria's quarterly dividend to $0.98, which represents a dividend yield of about 9%. To put this into perspective, this was Altria's 58th dividend increase during the past 54 years.
In addition to passive income from the dividend, management also reminded investors that during the first half of 2023, the company bought back $472 million worth of stock. Management also expects to repurchase an additional $528 million of shares by year-end, thereby completing its $1 billion buyback plan.
Finally, to add some valuation content here, I decided to look at the company's price-to-sales (P/S) ratio over the past five years. Per the chart below, Altria now trades at a P/S of 3.8, which is significantly lower than where it traded for most of 2021 and 2022.
Data source: YCharts
While Altria's business is not immune to factors such as inflation and its effect on consumer spending, a key investor takeaway could be that the stock may be oversold. Given that management has potentially found some savvy ways to keep investors enthusiastic with the acquisition of NJOY along with share buybacks and an increasing quarterly dividend, it could be worthwhile to add some shares at these trading levels.
I believe that Altria is doing the best it can to cope with tough consumer trends and building a long-term path to success. The company has a rich history of increasing its dividend, which personally makes me believe the current payment is sustainable.
A prudent strategy could be to dollar-cost average into the stock over time. It will be important for investors to keep up with management's commentary around the economy and consumer spending.
