On August 23, the markets tumbled due to the escalating trade war. The S&P 500 Index lost around 2.6%. However, Altria (MO) stock held out and lost just 0.4% on the day. The stock’s outperformance can be attributed to an upgrade by Morgan Stanley as well as investors’ preference for dividend yields amid an uncertain market outlook. Altria has fallen around 6% so far in 2019, underperforming the broader markets.
On August 23, Morgan Stanley upgraded Altria stock from “underweight” to “equal-weight.” Morgan Stanley has a price target of $44 on the stock. MO closed at $46.4 on the day. Nine out of 16 Reuters-surveyed analysts rate it as a “buy,” and it has an upside potential of roughly 24% based on analysts’ mean price target.
Altria’s dividend yield is attractive
A fall in Altria’s price over the last two years and rising dividends have pushed its yield higher. On August 22, the company announced a rise in its dividend for the 54th time in 50 years. Based on the new dividend, the stock offers a yield of approximately 7.2%. The company targets a dividend payout ratio of approximately 80% of its adjusted EPS. Howard Willard, Altria’s chair and CEO, said about the dividend increase, “Over the past half century, Altria has demonstrated its steadfast commitment to rewarding shareholders despite numerous shifts in the tobacco landscape. Today, we remain focused on our shareholders as we lead the industry through a period of evolution.”
As the company struggles to grow its top line, it has managed to reward its shareholders through dividend growth. In the long term, the expected declines in cigarette industry volumes may continue to make revenue growth difficult for Altria. At the same time, health risks associated with e-cigarettes may limit Altria’s potential growth in this segment. However, Altria’s investment in Cronos Group (CRON) is a significant potential growth driver for the company. Its management remains focused on dividends as a way to return value to the shareholders, so it’s becoming increasingly attractive as a dividend stock.
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