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 company’s dividend payout ratio for the trailing twelve months has cooled down to 77.8%, supported by industry-beating earnings growth. Altria’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 company’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 company’s estimated decadal compounded annual growth rate [CAGR] of 6.7%, next year’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 year’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.
Altria’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 company’s profitability, accounting for the lion’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. Altria’s subsequent venture with NJOY Holdings, while notable, awaits validation.
Market Multiples and Prospects
Yet, despite these challenges, Altria’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 Altria’s dividends remains a critical consideration, given the evolving landscape of the tobacco industry.