Wall Street experts are bullish on U.S. tobacco company Altria Group (MO -0.37%), which sells Marlboro cigarettes domestically. The average 12-month price target from analysts implies a 15% upside, plus investors must factor in a tremendous dividend that yields almost 10% at the current share price.
But the stock has underperformed the broader market for several years, so is this where investors can finally see some steady green? The company recently reported fourth-quarter earnings for 2023, setting the tone for what's to come.
Here is what you need to know.
The dividend is safe and sets a high floor
The great thing about Altria's dividend is that yielding 10% means that investors are starting with a very high floor for investment returns. Sure, share price declines are still a threat (more on that later), but the S&P 500 has historically returned between 9% and 10% annually.
It's fair to ask why the stock is trading so low that the dividend yield is so high, and the most likely answer is that smoking is in secular decline. For decades now, fewer people have picked up the habit each year, which means Altria ships fewer cigarettes as well.
So Altria is not a growing company. For many years now, it has used pricing power to offset volume declines and maintain its financials. You can see how simple the formula is below.
Altria generates roughly $8.5 billion in free cash flow and spends about 80% of it on its dividend, which leaves just enough to repurchase approximately $1 billion in shares. That squeezes out a tiny bit of growth on a per-share basis.
MO free cash flow, data by YCharts; TTM = trailing 12 months.
It's not a risk-free dividend, but Altria has done this routine for a long time and hasn't failed yet. And it has a healthy balance sheet, with an investment-grade credit rating (BBB).
The company also owns a 10% stake in Anheuser-Busch InBev, currently worth over $12 billion, that it could liquidate at any time.
Does Altria stock have a 15% upside?
As already noted, Altria is not a growing company. Earnings per share (EPS) grew just 2.3% year over year in 2023, and management is guiding for 4% growth in 2024 at the high end.
But unlike years back, the stock trades at a more realistic valuation today. Altria's price-to-earnings (P/E) ratio is just 8 times 2024 guided earnings. That's reasonable when the company is growing at a low- to mid-single-digit pace.
The company is working on long-term growth opportunities beyond cigarettes, including oral nicotine pouches and heat-not-burn tobacco devices. These are similar to an electronic cigarette but use real tobacco to create a flavor similar to cigarettes without producing the same smoke.
Based on analysts' price target, they could be looking for a higher valuation on the stock since earnings growth alone likely won't approach double digits over the next year. Ultimately, that will depend on the company's updates on its next-generation products over the coming year or a game-changing move like cashing in its stake in Anheuser-Busch.
A winning stock for income investors
But even if none of that happens, investors are looking at a 10% dividend plus another few points in earnings growth if Altria maintains its current valuation. Barring something unforeseen, I don't think there's a ton of risk for Altria's valuation to fall much lower than it already has.
Wall Street punished Altria when myriad regulatory problems ruined the company's massive investment in electronic cigarette company Juul. It has shed Juul and moved on since, and that is seemingly priced into the stock at its low valuation today. Again, low- to mid-single-digit earnings growth is satisfactory if you're paying a single-digit P/E ratio to own it.
Overall, Altria stock is a pretty nice package for income-focused investors.
