Will Altria Erase Its Losses and Turn Positive?

  • Citigroup recently upgraded Altria stock.
  • Expected moderation in the cigarette volume decline rate, a low valuation, and a high dividend yield could support Altria stock.
  • Near-term challenges could limit Altria’s recovery.

On October 18, Citigroup upgraded Altria (MO) stock to “neutral” from “sell.” Citigroup expects the negative news surrounding vaping to boost cigarette volumes. Cigarette shipment volumes for both Altria and Philip Morris (PM) have been declining over the past several quarters. Notably, smokers shifting to e-cigarettes have been hurting these companies’ cigarette shipment volumes.  Altria stock underperformed the broader markets owing to lower shipment volumes.

Altria’s Smokeable Products segment’s domestic cigarette shipment volumes fell 7.0% in the first half of 2019. However, as negative sentiments crop up around vaping, Citigroup expects the rate of decline in cigarette shipment volumes to moderate for Altria. It raised its price target on Altria stock to $46 from $45.

Philip Morris’s cigarette shipment volumes fell 5.9% in the third quarter, reflecting an increase in its rate of decline. In the previous quarter, Philip Morris’s cigarette shipment volumes decreased by 3.6%. Philip Morris posted its third-quarter earnings results on October 17. The company’s revenue improved on the back of heated tobacco products and higher pricing. However, its revenue fell short of estimates, reflecting lower shipment volumes. Philip Morris’s bottom line surpassed expectations by a wide margin. However, its EPS fell marginally, reflecting pressure on its margins.

Altria stock: Low valuation, high dividend yield

Altria stock has shown some recovery recently. The stock is up about 8% so far in October. However, it’s still down about 10% on a YTD (year-to-date) basis as of October 18. The decline in Altria stock has resulted in a lower valuation. Moreover, a decrease in its stock value and a consistent increase in its dividend have driven its dividend yield up.

Altria stock offers a dividend yield of 7.6%, which is very high. The company is a dividend aristocrat and has increased its dividends 54 times in the past 50 years. On August 22, Altria raised its quarterly dividend by 5% to $0.84. Meanwhile, it’s targeting a dividend payout ratio of about 80%. Further, the company boosts shareholders’ returns through share buybacks. In comparison, Philip Morris’s dividend yield remains high at 5.8%.

Altria stock is trading at a forward earnings multiple of 10x, which seems low. Moreover, its valuation is nearly half the peer group average. In comparison, Philip Morris stock is trading at a forward earnings multiple of about 15.0x. Altria has a low valuation for a good reason. The continued decline in domestic cigarette shipment volumes and regulatory hurdles surrounding Juul Labs, in which it holds a significant stake, has weighed on its stock.

Despite Altria’s low valuation and high dividend yield, recovery might not happen soon. Regulatory issues and lower cigarette volumes could continue to hurt it.