Altria: Steady Income from Valuable Brands

02/04/2020 5:00 am EST

Focus: CONSUMER

Ben Reynolds

CEO, Sure Dividends

Altria Group (MO) sells cigarettes, chewing tobacco, cigars, e-cigarettes, and wine under the Marlboro, Skoal, Copenhagen, and St. Michelle brands, among others, notes income expert Ben Reynolds, editor of Sure Dividend.

The company also has a 10% equity stake in Anheuser-Busch InBev (BUD), a 35% stake in e-cigarette maker Juul Labs, and a 45% stake in the marijuana company Cronos Group (CRON).

Altria has tremendous competitive advantages. It has the most valuable cigarette brand in the U.S., Marlboro, which commands greater than a 40% domestic retail share.

This gives Altria the ability to raise prices to drive revenue growth, as it has done for many years. Thanks to Altria’s stable growth, the company increased its dividend for the 50th consecutive year in 2019.

Another benefit of Altria’s business model is that it is highly resistant to recessions. Given Altria’s own exposure to cigarettes and now, e-cigarette products, in addition to its sizable investment stake in AB InBev, it should hold up very well during the next downturn.

Altria’s biggest risk is the declining U.S. smoking rate, the impact of which was seen clearly in its results to start 2019.

In response, Altria has invested heavily in non-combustible products that it believes carry fewer health risks, such as its $13 billion investment in e-cigarette leader Juul and its $1.8 billion investment in Cronos.

Altria also recently invested $372 million to acquire an 80% ownership stake in Swiss tobacco company, Burger Söhne Grp., to commercialize its tobacco leaf-free on! brand of oral nicotine pouches. In addition, Altria recently announced a new $1 billion share repurchase program, which the company expects to complete by the end of 2020.

Altria stock trades for a price-to-earnings ratio of 11.2, compared with our fair value estimate of 11.5. As a result, Altria stock appears to be slightly undervalued, which could result in returns of 0.5% per year due to multiple expansion over the next half decade.

Expected annual EPS growth of 4% over the next five years and the current dividend yield of 6.7% combine with anticipated multiple expansion to produce our estimate of 11.2% in annualized total returns over the next half decade.

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