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US tobacco company Altria Group $MO
Has seen its share price steadily drop over the past three years.
At $40 per share, the stock's dividend yields a whopping 8.5%.
Is this a "yield trap"?
Has seen its share price steadily drop over the past three years.
At $40 per share, the stock's dividend yields a whopping 8.5%.
Is this a "yield trap"?
This idea would imply that Altria is not a quality company.
I don't agree with this. The company has raised its dividend each of the past 51 years.
Today, the dividend is covered by free cash flow with a payout ratio of 82.5% over the three quarters in 2020.
I don't agree with this. The company has raised its dividend each of the past 51 years.
Today, the dividend is covered by free cash flow with a payout ratio of 82.5% over the three quarters in 2020.
This is roughly in line with management's own threshold.
Tobacco companies can afford to payout a higher % as dividends because of the fact that a tobacco company requires little capital,
And as a US company, cannot spend on advertising.
Tobacco companies can afford to payout a higher % as dividends because of the fact that a tobacco company requires little capital,
And as a US company, cannot spend on advertising.
Meanwhile, cash flows should remain stable for the near future as the US cigarette industry (which is in long term secular decline) has stabilized in the face of Covid.
Consumers are stressed, and smoking more as a result.
Consumers are stressed, and smoking more as a result.
While fewer people are smoking over time, Altria has been able to offset volume declines with price increases.
The stabilization of the core business has reinforced Altria's earnings ability, with 2020 EPS guided at approx. $4.34 per share.
The stabilization of the core business has reinforced Altria's earnings ability, with 2020 EPS guided at approx. $4.34 per share.
With Altria trading at $40 per share, the stock's earnings multiple of 9.2X represents a bargain of a stock that offers a funded dividend with high yield
Over the short term investors can expect income and potential price gains as the multiple expands once sentiment improves
Over the short term investors can expect income and potential price gains as the multiple expands once sentiment improves
Over the long term, more uncertainties remain that long term investors would want to keep an eye on as they develop:
Juul has been virtually written off, and has become a lottery ticket asset for the future.
Juul has been virtually written off, and has become a lottery ticket asset for the future.
Altria has a portfolio of reduced risk nicotine products including On! mouth pouches and IQOS heated tobacco.
The products are promising, but will depend on whether Altria can grab similar market share to what Marlboro holds now.
The products are promising, but will depend on whether Altria can grab similar market share to what Marlboro holds now.
The company's balance sheet now holds $28B in long term debt, but low interest rates and stable cash flows give reason for relief.
If anything, the debt handcuffs Altria from making more bold moves.
Would like to see Altria address the balance sheet.
If anything, the debt handcuffs Altria from making more bold moves.
Would like to see Altria address the balance sheet.
One wild card is Altria's 10% stake in AB-InBev $BUD.
Altria has the ability to sell its stake in late 2021, and the proceeds would put a large dent in shoring up the company's debt load.
Altria has the ability to sell its stake in late 2021, and the proceeds would put a large dent in shoring up the company's debt load.
Cannabis is another wild card, with an assumed Joe Biden presidency likely to be favorable for cannabis legalization (or at least decriminalization at the fed level).
Altria's stake in Cronos $CRON opens them up to that opportunity....
Altria's stake in Cronos $CRON opens them up to that opportunity....
But similar to reduced risk products, it becomes a game of land grab and execution.
Altria certainly has the experience and the deep pockets to give themselves a solid chance of success,
But it's certainly not as sure a bet as the cigarette business.
Altria certainly has the experience and the deep pockets to give themselves a solid chance of success,
But it's certainly not as sure a bet as the cigarette business.
In summary, Altria has been beaten down more than it deserves to be.
Tobacco is out of favor with the markets, but I would expect fundamentals to eventually push shares higher again.
Longer term investors will need to monitor cannabis and RRPs for execution.
Tobacco is out of favor with the markets, but I would expect fundamentals to eventually push shares higher again.
Longer term investors will need to monitor cannabis and RRPs for execution.
As long term return potential hinges on these things that are currently unknown.
-Justin ( @TheeFinanceGuy)
-Justin ( @TheeFinanceGuy)
