Turtle-like tobacco giant Altria Group (NYSE:MO) has been unusually warm this year. Shares are up more than 15% in 2024, a rare rise given the poor share price performance over the past five years.
The reason for the title leak? It could be that Altria has put its disastrous investment in Juul in the rearview mirror, giving investors a chance to focus on what remains a still very resilient core business that revolves around its premium smokables brand, Marlboro .
No one will mistake Altria for a high-growth company, which means investors should be careful. A slow-growing stock can quickly become expensive when stocks start seeing double-digit gains.
So, is Altria’s luck here to stay, or is it just a short-term rally? Here’s what you need to know.
Altria’s dividend remains the star attraction
Smoking is a notoriously difficult habit to quit. The resulting pricing power has paved the way for years of steady profits for industry players despite long-term declines in U.S. smoking rates. Altria owns Marlboro, the country’s leading cigarette brand with an estimated total retail market share of 42% and a 60% hold on the premium segment.
This made Altria a King of dividends; the company has paid and increased its dividends consistently for more than five decades, a remarkable feat that has allowed the payout to survive recessions, wars, and the general ups and downs of being a public company.
Investors can enjoy a massive 8.4% dividend yield at the current stock price, and Altria can afford it. The dividend payout ratio is approximately 75% of cash flow and management likes to keep the ratio close to this level. You can’t buy many super-high-yielding dividend stocks and sleep well at night, but Altria is an exception.
Resetting expectations after five difficult years
Altria’s valuation became too high in the mid-2010s, when shares were trading at more than 23 times earnings, which is very high for a tobacco company. Not only did the stock’s valuation begin to calm down, but the Juul debacle, which began in late 2018, further shook Wall Street’s sentiment toward the stock and pushed the P/E ratio into the single digits.
Frankly, Juul’s investment was a catastrophic mistake that has weighed on the stock for years. Altria only formally parted ways with Juul last year.
Today, shares trade at a forward P/E of 9.2:
The positive side is that this is a great time to re-evaluate and reset expectations. After all, Juul is now a thing of the past and the stock’s valuation is no longer in the stratosphere.
So, is Altria a buy?
A stock paying a dividend yield above 8% only needs a few points of earnings growth to generate double-digit total returns. You can see above that shares may have become too cheap in January of this year, which contributed to Altria’s recent rally.
The big question is: what could happen next? Fortunately, Altria’s valuation still makes a lot of sense, reducing the risk of another horrible period like the one investors just experienced…
