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Altria Group: Prospects of Dividends and Price Growth Altria Group: Prospects of Dividends and Price Growth

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Cigarette Labels No Longer Allowed To Say Light, Mild, And Low

Tobacco company Altria Group (NYSE:MO) has experienced a tough year in the stock markets, with its share price declining by 11.6%, a stark contrast to the near 25% increase in the S&P 500 (SP500) index.

Despite this, MO remains distinguished for having the highest dividend yield among all S&P 500 stocks, standing at an impressive 9.5%. Notably, the company boasts a remarkable 54-year track record of consistent dividend payments.

Over the past decade, the company has nearly doubled investor money through lucrative dividend payouts, despite modest price returns of 6.4% during this period (see chart below). The question now is whether it can replicate this performance in the next decade.

Steady Growth in Dividends

Altria has set its sights on a progressive dividend policy, targeting mid-single digits in dividend per share growth annually. In the past decade, the company has consistently increased its dividends yearly, with the dividend yield remaining healthy. The lowest year-end yield was 5.6% in 2017, and the highest was 10.5% in 2020 (see table below).

Promising Dividend Outlook

Looking ahead, the next year holds promise for dividends. The companyโ€™s dividend payout ratio for the trailing twelve months has cooled down to 77.8%, supported by industry-beating earnings growth. Altriaโ€™s reported diluted earnings per share [EPS] for the first nine months of 2023 have doubled, chiefly due to income from investments in equity securities, in contrast to a loss the previous year. The adjusted diluted EPS also rose by 3.3%.

This sets the stage for dividend growth next year, bolstered by the companyโ€™s positive earnings outlook. Despite a slight adjustment downward in its latest earnings update, the company still anticipates an increase in EPS. It expects the adjusted diluted EPS to increase by 1.5-3% year over year, projecting significant growth in absolute terms.

Based on the companyโ€™s estimated decadal compounded annual growth rate [CAGR] of 6.7%, next yearโ€™s expected dividend per share would be USD 4.1, indicating a healthy forward dividend yield of 10.2%, higher than the current trailing yield of 9.6%. Even the lower forward yield estimated by analysts at 9.8% is notably higher than the trailing one.

Lingering Uncertainty on Dividend Longevity

While next yearโ€™s dividends present an optimistic forecast, it does not suffice to guarantee a similarly positive trajectory over the next decade. The declining popularity of smoking presents a substantial challenge. The global tobacco industry is estimated to have suffered a 3% volume decline in 2023, pointing to a broader shift away from traditional tobacco products.

Altriaโ€™s figures corroborate this trend, with a 2.5% reduction in net revenues for the first nine months of 2023, primarily due to weakness in the smokeable products segment. This segment remains crucial to the companyโ€™s profitability, accounting for the lionโ€™s share of its operating profits. Although its smoking alternative brand on! witnessed a noteworthy volume increase, it still represents a small revenue contributor. Additionally, the company withdrew its investment in Juul Labs following its ban in the US, indicating uncertainty in the vaping market. Altriaโ€™s subsequent venture with NJOY Holdings, while notable, awaits validation.

Market Multiples and Prospects

Yet, despite these challenges, Altriaโ€™s market multiples appear fairly compelling at present. Its trailing twelve months and forward GAAP price-to-earnings (P/E) ratios signal a potential upside to the stock compared to the average multiples for the tobacco industry. Although Altria is the only tobacco company to experience shrinking revenues on a TTM basis, its earnings have seen a substantial 90% increase over the past year, outpacing its peers significantly. On average, the P/Es suggest the possibility of a 25% increase in share price.

In light of these factors, there is a strong case for considering Altria as an investment now. Not only are dividends likely to remain lucrative, but there is potential for a price uptick. However, for longer-term investors, the sustainability of Altriaโ€™s dividends remains a critical consideration, given the evolving landscape of the tobacco industry.

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