The Top 5 Dividend Kings, Part 5: Altria Group

05/22/2020 5:00 am EST

Focus: STRATEGIES

Ben Reynolds

CEO, Sure Dividend

Investors looking for companies that generate stable cash flow in recessions should consider tobacco stocks. Tobacco is a highly recession-resistant industry, explains Ben Reynolds, editor of Sure Dividend.

Consider Altria Group (MO), which produces Marlboro, the top cigarette brand in the United States. Altria has raised its dividend 54 times in the past 50 years, qualifying it as a Dividend King.

We believe it will continue to reward shareholders with rising dividends for many years, due to its flagship tobacco brands as well as its investments in next-generation products.

This is a particularly good opportunity to invest in Altria, due to its low valuation and high dividend yield of 9%. For all these reasons, Altria is our #1 Dividend King.

Read the Top 5 Dividend Kings, Part 1: Genuine Parts

Read the Top 5 Dividend Kings, Part 2: Emerson Electric

Read the Top 5 Dividend Kings, Part 3: Federal Realty

Read the Top 5 Dividend Kings, Part 4: H.B. Fuller

Altria is a consumer staples company that generates annual revenue of approximately $25 billion. The stock has a current market capitalization of $69 billion. Altria’s core segment is smokeable products, which includes Marlboro cigarettes as well as the company’s John Middleton cigar brand, and represented approximately 88% of the company’s 2019 revenue.

Traditional smokeable products continue to make up the vast majority of Altria’s revenue, which poses a risk for shareholders due to the persistent decline in smoking rates.

In response to changing consumer trends, Altria has taken steps in recent years to diversify its product portfolio. The company owns the smokeless tobacco brands Skoal and Copenhagen, wine manufacturer Ste. Michelle, and it also owns a 10% investment stake in global beer giant Anheuser-Busch InBev (BUD).

Altria has also invested in next-generation categories such as its $13 billion investment in Juul Labs, and its $1.8 billion investment in marijuana producer Cronos Group. These investments are meant to pave the way for Altria’s future, in a post-cigarette environment.

In the meantime, Altria’s legacy brands continue to generate strong profitability and growth. In the first quarter, Altria’s revenue increased 15% to over $5 billion, due to 6%+ growth in smokeable products volumes.

Consumers stockpiled their pantries in the 2020 first quarter, in preparation for lockdowns due to coronavirus. Altria’s adjusted EPS increased 18% last quarter.

While many companies are fighting for their very survival in the coronavirus crisis, Altria has a strong balance sheet and sufficient liquidity. It recently drew $3 billion on its revolving credit facility and suspended its share buybacks. But it remains committed to maintaining its dividend policy, which is a target dividend payout ratio of 80% of annual adjusted EPS.

Altria stock trades for a price-to-earnings ratio of 8.9, based on our full-year adjusted EPS estimate of $4.25. This is below our fair value estimate of 11. As a result, Altria stock appears to be undervalued. An expanding valuation multiple could boost annual returns by approximately 4.3% over the next five years.

In addition, we expect Altria to generate annual adjusted EPS growth of 3% to 4% per year, comprised of modest revenue growth, margin expansion, and resumption of share repurchases in 2021.

Lastly, the high dividend yield of 9% leads to total expected returns of 16% to 17% per year over the next five years, making Altria our top-ranked Dividend King.

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