Altria (MO): A Dividend Machine?
By:NewsyStocks   Tuesday, August 17, 2021 11:03 AM

With unemployment hovering around 9.5%, concerns over a double-dip recession, and the expectation that the U.S. recovery may be stalling, you would figure that consumers would be reining in their spending -- especially on discretionary products.  However, Altria, which operates through its main subsidiary Philip Morris USA, has continued to boost sales of its tobacco and related products. Despite the recession, raised taxes and regulatory fears, the nation's largest cigarette maker actually boosted net income by 38%. Its leading brand, Marlboro, increased its market share and now owns about 42.7% of the U.S. smoking segment.  In addition, Altria's smokeless tobacco products saw a volume increase of 21.9% and a revenue increase of 24%.  Consumers might be spending less, but the products that they are not cutting corners on -- cigarettes and alcohol -- just happen to be Altria's bread and butter

It's hard to argue against the staying power of Altria's products. You can't ignore the increased revenue or net income, or the fact that over the last 10 years, the stock has seen dividend-adjusted annualized gains of 20% -- far superior to the S&P 500's decline of 2%.



Growth Rate


Altria Group




Altria not only pays a great dividend, but it has been doing so for the last 70-plus years; in addition, its dividend-adjusted stock price has increased an average of 13% over the past half-decade. Unilever and Procter & Gamble are probably the most comparable businesses to Altria, considering they all provide consumer products that could easily be described as recession-proof. However, with a higher dividend yield and trading for 13 times earnings, Altria seems like a cheaper way to earn higher dividends.

The company is trading at 12.56 times earnings -- a 35% discount to the S&P 500's P/E ratio. Altria's forward P/E is an even more attractive 9.59. And the PEG ratio is a solid 1.30, which means the stock is rising roughly in line with its growth prospects. What's more, as of the end of 2009, the company is sitting on over $1.8 billion of cash. Altria's profit margins are in the double digits, at 19.06%. That crushes the entire consumer goods sector by a whopping 181%. The company's Return on Equity (ROE) checks in at more than 90%. This is huge. It suggests extremely competent management, which we know nearly always leads to above-average investor returns.

Altria also comes with a built-in currency hedge. It's fashionable to knock the U.S. dollar as of late. But the problems emerging in Portugal, Italy, Ireland, Spain, and, most notably, Greece, have lifted the hood on problems inside Europe and, subsequently, the euro. The company's revenues are derived mainly in the United States and therefore are in U.S. dollars. And with trouble in Europe, traders are moving into dollars as a safe haven. Altria's U.S.-dollar-based revenues may give it an edge over competitors who receive revenue from European markets. This is not quite the hedge that Asian currencies provide, but a hedge nonetheless. This advantage may not last forever, but it should benefit the Company and shareholders in the near term, and perhaps even longer.

Ratios Look Risky

Altria currently pays a dividend of 6.2%. That is certainly nothing to sneeze at, as the average dividend payer in the S&P 500, in 2009, sported a yield of 2%. But what's more important than the dividend itself is Altria's ability to keep that that cash rolling. The first thing to look at is the company's reported dividends versus its reported earnings. If you happen to see dividend payments that are growing faster than earnings per share, it may be an initial signal that something just is not right.

According to the most recent data, Altria's payout ratio is 81%. Altria is obviously paying out a substantial portion of its net income in the form of a dividend. This isn't necessarily a bad thing -- companies can increase their payout ratios over time, possibly because they are becoming more mature, or possibly because that's the best way to increase shareholder value. What's important is if there's enough cash on hand to support that high payout ratio.

Altria's coverage ratio is 1.17, -- which is not enough to make a conservative investor feel comfortable. There could be a number of reasons the number is so low -- maybe it is typical for the industry, there is a significant amount of debt coming due, or Altria is simply less than stellar at managing its assets.

Altria's payout ratio seems to be above the peer average, which means if you're a prudent investor, you may want to look elsewhere for the most secure payment possible The bottom line, however, is to make sure that with anything -- whether it be a dividend, a share repurchase, or an ordinary earnings report -- you do your own due diligence.