The company in focus will be Altria Group, the first of five global stock picks for the year. Given the recent uncertainty, Altria has historically shown itself to be a robust business that can weather market crises effectively. Specifically, Altria has been a dividend stalwart over the years and is a great company for investors seeking to reduce risk through regular, consistent dividend payments.
Altria is a New York-listed US$100 billion ($127.4 billion) market-cap consumer-staples company that primarily manufactures smokable and tobacco products in the US through its wholly and partially owned subsidiaries. Some of its key subsidiaries include Philip Morris USA, John Middleton Co, Helix Innovations and NJOY. Collectively, these subsidiaries are involved in the manufacturing and sales of cigarettes, cigars, smokeless tobacco, oral nicotine pouches, and e-vapour products. Almost 90% of Altria’s revenue is derived from its smokeable products segment, 10% from its oral tobacco products, and the remaining from e-vapour and other products.
The case for Altria and the overarching theme for these global picks are realised returns through dividends. If Altria can pay dividends consistently at a relatively attractive yield, that alone is sufficient, with any prospective business developments and tailwinds as supporting factors for investment returns. As an investing strategy, it is wise to buy more or average down as the share price falls, since dividend yields would rise, and to hold or partially liquidate as the share price rises to a point where the dividend yields are no longer attractive. The benchmark for a good yield is the opportunity cost of not investing in it, such as the risk-free Treasury yield. Currently, the US risk-free rate is around 4.18%.
Chart 1 shows Altria’s historical dividend yield over a 10-year period, which it has paid consistently every quarter. What’s impressive is that this company has maintained a high average dividend yield of 6.51% with no one-off outliers. In fact, the lowest dividend yield over this period is still pretty good at 3.07%, while the highest dividend yield recorded was 10.45%, during the peak of the Covid market crash in 2020. To further support this, the disparity between price-only returns and dividend-reinvested returns is huge for Altria over the same 10-year period. The former’s return is merely 9.35%, while the latter’s return is 113.79%. Over a five-year period, the price-only return is 9.0% CAGR, while the dividend-reinvested return is a substantial 17.91%.
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To ensure the business remains relevant amid regulatory pressures, Altria’s key strategy is to create a smoke-free environment and community. Essentially, this is an effort to transition smokers away from cigarettes and combustible smokeable products and towards smoke-free products such as oral tobacco and e-vapour, which have been gaining traction. As long as the business can manage and adapt to key risks, it should continue paying lucrative dividends.
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Financially, Altria has performed well over a 10-year period, reflecting its robustness despite being in a regulated industry, which reaffirms its ability to pay consistently attractive dividends. Chart 2 shows Altria’s revenue, net income, operating cash flow, and free cash flow over this period, along with forecasts for the next two financial years. The company’s margins, which represent its wide moat through high barriers to entry from regulations and pressure from health-conscious parties, have also been healthy. Currently, Altria’s gross margin, operating margin, and net margin stand at 72.2%, 49.2% and 34.5%, respectively. 10 years ago, these figures were 56.6%, 42.5% and 28.2% respectively.
In terms of financial safety, the company’s current ratio is below average at 0.65 times. However, its interest coverage ratio and Altman Z-score exceed their respective benchmarks by over 10 times and four times, respectively. In terms of relative valuation, Altria trades at a 16%, 4% and 13% discount to global peers for its forward P/E, forward EV/Ebitda, and forward EV/Ebit ratios, respectively. This indicates that Altria is an attractive pick-up compared to peers in the same industry.
Sentiment-wise, there are five “buy” calls, eight “hold” calls and three “sell” calls for Altria from analysts, with an average target price of around 5% below its current trading price of US$65.39 over the next 12 months. Based on a methodology that uses multiple valuation methods (see Charts 3a and 3b), the fair value of the company, including dividend reinvestments, is US$73.53, which is over 10% above its current trading price. Singapore investors seeking to purchase this stock can do so without much hassle through their international trading account, as the company is a large-cap US stock listed on the New York Stock Exchange. However, they must note the 30% withholding tax on US stock dividends for foreign investors if they choose not to reinvest the dividends.
