MO with Nobias Technology: Case Study on Altria
Altria (MO) has been known as a very reliable, defensive, dividend paying stock in the market for decades. The company is on a 52-year annual dividend increase streak. And, throughout much of 2022, MO shares have provided investors with a relatively safe haven in the markets, outperforming the S&P 500 by a wide margin (on a year-to-date basis, the S&P 500 is down 18.45% and Altria shares are down 9.53%). However, last week things changed, with the S&P 500 rising by 4.36% while MO shares fell by 5.01%. In recent days, MO has seen a slew of negative headlines, from an analyst downgrade to news that the FDA was banning products important to its long-term growth prospects. MO shares hit 52-week lows this week and yet, the credible authors and analysts that Nobias tracks continue to attach very bullish sentiment to MO shares.
With MO’s recent sell-off in mind, Mike Robinson, a Nobias 5-star rated author, recently put a spotlight on a report from Morgan Stanley’s analyst, Pamela Kaufman, who downgraded Altria to “underweight” which sent the stock falling 7%.
Robinson wrote, “Kaufman also reduced the price target for Altria from $54 to $50”. In her note, Kaufman said, “MO shares have outperformed the S&P 500 by 27% YTD, and when adjusting for the 7% decline in ABI’s price in USD, MO’s core business is +29% YTD. Market may shift to a more defensive posture, but we view risk-reward as biased to the downside due to the combination of short-term fundamental pressures with our longer-term worries about MO’s cigarettes portfolio, RRP offering and PM’s possible SWMA acquisition.”
MO Jun 2022
Chris Morris, a Nobias 4-star rated author, also covered the Morgan Stanley downgrade, noting that the report highlights the threat of inflation and the pressure that it is putting on Altria’s customers, as a primary threat to the company’s fundamental growth in the near-term.
Morris wrote, “Morgan Stanley believes there is an inverse relationship between gas prices and cigarette sales—and gas prices on Wednesday were averaging $4.95 nationwide, according to AAA.” What’s more, the end of the COVID-19 pandemic period is seen as a potential demand headwind for cigarette sales.
Morris said, “The stress of the COVID pandemic was widely seen by analysts as the primary reason for a major comeback year for cigarettes in 2020, the first increase in cigarette sales in two decades. The Federal Trade Commission's annual Cigarette Report found 203.7 billion cigarettes sold in 2020, a 0.4% increase from 202.9 billion in 2019.”
Tradevestor, a Nobias 5-star rated author on Seeking Alpha, recently published a report which noted the Morgan Stanley downgrade, but explained why that author remains bullish on Altria, all the same. Tradevestor wrote, “The downgrade is citing macroeconomic conditions as the primary reason. However, Altria is likely to withstand the pressure from these for two reasons: pricing-power and inelasticity.” The author continued, saying, “Despite being up 14% YTD while the S&P 500 (SPY) is down nearly 13%, Altria is still trading at a forward multiple of 11 and yields 6.70%. That tells us that quite a bit of micro, macro, and regulatory risks are priced into the stock. There is clearly not much optimism when you put those numbers together.”
In other words, the recent out-performance that Altria has generated doesn’t mean that the stock is trading with a sky-high valuation. Altria’s ~11x price-to-earnings multiple is still far below the S&P 500’s price-to-earnings multiple, which currently sits at 19.77x, according to multpl.com.
With regard to the recent analyst downgrade and MO’s share price weakness, Tradevestor said, “We will stay invested heavily in Altria and continue to add on weakness”. They concluded their article stating, “For long-term investors, staying in through thick and thin with high-yielding stocks of good businesses has almost always paid off.”
Altria’s high dividend yield remains one of the primary reasons that several of the credible authors who have posted reports recently remain bullish on MO shares. Altria currently yields 8.29%. And, as Nobias 5-star rated author, Dividend Power, points out, the company has a history of reliable dividend growth as well.
In a recent article at Seeking Alpha, Dividend Power wrote, “Additionally, Altria increased the dividend by 4.7% in 2021. The trailing dividend growth rate is 8.42% CAGR in the past 5 years and 8.34% in the past 10 years.” Tradevestor also highlighted MO’s strong dividend yield and dividend growth outlook. In this article, they analyzed Altria’s forward dividend growth prospects for 2022 writing: “Altria goes ex-dividend for 90 cents a share on June 14th, and it will be the 4th straight quarter of paying 90 cents. That means only one thing for Altria investors: a dividend increase announcement is expected in August.
Current forward EPS guidance is between $4.79 and $4.93. Let's be pessimistic and pick $4.80.
Altria has a stated policy/goal of paying 80% of its earnings in the form of dividends. 80% of $4.80 is $3.84 in annual dividend per share. That's 96 cents per quarter, a handsome 6.67% boost to the already attractive yield of 6.70%.”
Ultimately, when concluding their piece, Dividend Power expressed a bullish outlook that was similar to Tradevestor’s. Dividend Power wrote, “Altria is still a play on cigarettes and oral tobacco despite a secular decline due to health concerns, FDA approval process, advertising regulation, and taxes. Altria is trying to grow its smokeless tobacco business but with limited success. However, the company has been able to raise cigarette prices more than offsetting volume declines. Furthermore, the barriers to entry are incredibly high, limiting competition. Hence, investor returns have been relatively good. Investors seeking high yield and dividend growth may find Altria interesting.”
And, as it turns out, relative outperformance (and the threat of mean reversion) alongside the competitive threat that Philip Morris (PM) offers aren’t the only significant headwinds that Altria faces. As Tradevestor said in another recent article, “When it rains, it pours.” They were speaking about headlines that broke late last week from the FDA which says that it is banning the sale of JUUL products in the United States (Altria had previously invested $12.8 billion into JUUL as a way to diversify its revenue stream away from combustible tobacco).
A recent Bloomberg article stated, “The Food and Drug Administration denied authorization to Juul Labs Inc. for all of its products currently marketed in the US, dealing a substantial blow to a company that was briefly a darling among both tobacco giants and Silicon Valley investors.”
A day later, an article from The Hill stated that Altria is challenging the ruling in court and therefore, “A federal appeals court on Friday temporarily blocked the Food and Drug Administration’s order banning the sale of Juul e-cigarettes, giving a reprieve to the company while the court hears more arguments.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
At this point, it’s unclear as to what the ultimate legal outcome will be regarding JUUL; however, as Tradevestor says, “We cannot predict the government's next action. We cannot predict the Fed's next action. We certainly cannot predict the war situation in Ukraine. But what we can predict with certainty is 9% compounded annually works out to a pretty satisfactory return over the long run.”
Tradevestor ended their article stating, “Altria's EPS may go down. Or they may increase. But what we can predict is that the company will still continue paying out 80% of what it makes to shareholders. And history so far suggest that the payout increases each year. Heroes are not made in the war field when the enemy just folds under pressure. Heroes are made when salvaging and even winning from a disastrous situation. Running when the chips are down isn't ideal. We are staying invested with Altria and even buying more on such opportunities. Good luck to everyone.”
Overall, when looking at the opinions expressed by the credible authors and analysts that the Nobias algorithm tracks, it appears that the vast majority of them share this bullish sentiment. 92% of recent articles published on Altria have expressed a “Bullish” bias for the stock. And right now the average price target being applied to MO shares by the credible Wall Street analysts that we track is $56.50/share. After selling off more than 5% last week on several negative headlines, Altria shares are trading for $43.40. Therefore, that average credible analyst price target implies upside potential of approximately 30.2%.
Disclosure: Nicholas Ward is long MO. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.