Altria Stock: High Dividend Yield Eases Investors’ Pain

  • Altria’s dividend yield is attractive due to the lower stock price and a higher dividend rate.
  • The stock trades at a multiyear low valuation.

On Tuesday, the broader markets took a hit due to escalating US-China trade tensions. The US added several Chinese companies to its trade blacklist. The Dow Jones Industrial Average fell by about 314 points, while the S&P 500 Index lost about 46 points. Despite negative sentiments, Altria (MO) stock held its ground and lost just 0.4%. The stock’s resilience could be due to its high dividend yield and multiyear low valuation.

Altria stock has fallen about 15% on a YTD (year-to-date) basis as of Tuesday. Part of the problem has been the company’s declining domestic cigarette volumes. Growing regulatory hurdles for Juul Labs also impacted Altria stock. The company owns a substantial stake in Juul Labs.

The decline in Altria stock pulled down its valuation to a multiyear low. A consistent increase in the company’s dividend rate and a lower share price pushed the dividend yield higher.

Altria continues to reward shareholders

Since the lower stock price dented investors’ return, Altria has rewarded its shareholders through higher dividends and share repurchases. On August 22, the company announced a 5% increase in its quarterly dividend to $0.84—the 54th increase in the last 50 years. Currently, Altria stock offers a dividend yield of 8% based on the new annualized dividend of $3.36 and a closing price of $42 on Tuesday.

Altria intends to boost shareholders’ returns. The company targets a payout ratio of about 80% of its adjusted EPS. Besides higher dividends, Altria also rewards shareholders with share repurchases.

Altria stock trades at a low valuation

Altria stock has fallen about 34% in a year. The lower share price led to a lower valuation. Altria stock trades at 9.7x its forward earnings estimate, which is at a multiyear low. The stock trades at a discount of about 44% from its average historical multiple of 17.4x. Notably, the stock also trades at a discount of 32% compared to Philip Morris (PM) stock.

Philip Morris stock trades at a forward PE multiple of 14.3x. The stock has risen 14.4% YTD. Philip Morris stock also offers a lucrative dividend yield of 6.1%. Growing regulatory scrutiny probably won’t impact Philip Morris much.

Altria stock trades at 9.6x its next 12-month EV-to-EBITDA multiple, which is well below the peer group average of 14.8x.

Altria’s low valuation compared to its peers seems justified given the near-term headwinds. While soft sales growth could restrict the recovery in the stock, analysts expect Altria’s bottom line to increase at a healthy rate in fiscal 2020. Higher pricing and share repurchases will likely support the company’s bottom line. Altria’s high dividend yield and healthy EPS growth make the stock attractive.

Analysts’ have a consensus target price of $53.50 on Altria stock, which implies a potential upside of 27.4% based on its closing price on Tuesday. Among the 15 analysts covering the stock, seven recommend a “buy,” seven recommend a “hold,” and one recommends a “sell.”

In comparison, 13 out of 18 analysts recommend a “buy” on Philip Morris stock, four recommend a “hold,” and one recommends a “sell.” Analysts’ target price of $95.12 implies an upside of 24.6% based on its closing price of $76.37 on Tuesday.