Is the Altria share a value or a value trap?

It is no exaggeration to say that Altria (MO -1.92%) could be the best dividend-paying stock in history.

The national tobacco company has increased its dividend 57 times in the past 53 years, most recently raising the quarterly payout by 4.4% in August to $0.94 per share.

In fact, for much of the past 50 years, Altria was the best stock you could own, largely due to its increased dividend payouts. According to Wharton professor Jeremy Siegel, $1 invested in Altria in 1968 turned into $6,638 in 2015 with dividends reinvested.

However, if you expected Altria to produce these kinds of returns in the years after 2015, you would have been disappointed. As the chart below shows, the stock price is down 31% since then, and even taking dividends into account, the total return is only 5%, well below the S&P500 at 104%. This weak performance comes even as Altria’s dividend has increased by 66% over the past seven years.

MO data by YCharts.

Altria’s stock price peaked in 2017 and has fallen around 50% since then due to concerns about declining cigarette consumption and its bad bets on JUUL Labs and Chronos Group. Despite these headwinds, revenues and profits at Marlboro’s parent company continued to grow, thanks in large part to price increases.

Graph of operating income MO (TTM)

MO Operating Revenue (TTM) data by YCharts.

As the share price has fallen, the dividend yield has risen, and except for a brief spike during the pandemic-influenced stock market crash in March 2020, the 9% yield is now the highest since the company separated from Philip Morris In 2008.

MO Dividend Yield Table

MO dividend yield data by YCharts.

At the current price, is Altria a value stock or a value trap? Let’s take a look at both sides of the argument.

The case of Altria as a value stock

By conventional valuation measures, Altria’s bona fide as a value stock is clear. It offers a 9% dividend yield, making it one of the best performing large-cap stocks on the market. The company’s track record of rising dividends and growing earnings should also give investors confidence that its dividend is well funded. The company is targeting an 80% dividend payout ratio, which means 80% of the company’s profits go directly to shareholders, and it has been closely tied to that goal for years.

Tobacco is a recession-proof industry, and given the company’s commitment to dividend growth, investors should expect the quarterly payout to increase, at least for the foreseeable future. . Altria’s share buybacks should also increase its dividend, as buybacks can increase earnings per share without increasing net income.

Dividend aside, the tobacco stock looks cheap at the current price. Its price/earnings ratio (P/E) is only 8.7, less than half that of the S&P500 P/E ratio at 18.3.

With a dividend yield of 9%, even if the stock just maintains its current dividend, that would be enough to create value for investors, especially in today’s uncertain macro environment. Continued increases in dividends would help set a floor on the stock price and draw more income investors into the stock, rewarding current shareholders.

Why Altria stock is a value trap

It’s no secret why Altria shares are so cheap. The company operates in a declining sector. Tobacco use peaked in the United States in the mid-1960s, when over 40% of adults smoked. In 1963, 523 billion cigarettes were sold in the United States. By 2020, that number had fallen to just over 200 billion, and the per capita smoking rate had fallen by 75%.

There is no doubt that smoking rates will continue to decline. Smoking restrictions continue to tighten, with the smoking age now at 21, and excise taxes have led to steep increases in the price of cigarettes in some states. Altria is not fighting against the decline in smoking. Its own vision statement is to “responsibly lead the transition of adult smokers to a smoke-free future”.

In other words, it’s betting on the demise of its core product, and it’s been aggressive in diversifying away from cigarettes with multi-billion dollar investments in JUUL Labs and Cronos Group, though those have resulted in billions of dollars in losses. He wrote off his investment in JUUL repeatedly as the major vape brand faced a tough crackdown from regulators, and Cronos is now worth around a quarter of what it was when Altria paid 1.8 billion dollars for a 45% stake in the company. Philip Morris’ heat-not-burn product IQOS, which Altria had also banked on to ease the transition from cigarettes, was pulled from the US market a year ago and has yet to return.

As cigarette sales continue to decline and Altria’s attempts to diversify away from cigarettes have fallen flat, the business just doesn’t seem viable in the long term. Ultimately, the drop in consumption will have an impact on the net result.

Someone who smokes a cigarette.

Image source: Getty Images.

The best way to play Altria action

Both arguments above can be true at the same time, depending on your time horizon. Altria is a reliable dividend payer and has demonstrated its ability to pass on price increases to its customers. After all, cigarettes are an addictive product, so its dividend seems safe at least in the short term.

However, price increases have been shown to reduce cigarette consumption, especially among young people, as the rate of teenage smoking in the United States has fallen from nearly 23% in 2000 to just 2.3% in 2021.

Consequently, the long-term picture looks much bleaker for Altria, and without a product to replace cigarettes, its revenues and profits will eventually peak as long as overall cigarette sales continue to decline.

If you’re an income investor with a short time horizon, Altria looks like a reliable dividend stock, and its 9% yield is sure to be attractive. Even better, the company is recession proof and rising interest rates will benefit stocks with strong current cash flows like Altria, as opposed to unprofitable growth stocks, as rising interest rates interest reduces the value of distant profits.

However, Altria isn’t a set-and-forget stock, and it’s probably a poor choice for investors with a longer time horizon, as regulators seem just as skeptical of vaping as they are. towards cigarettes, which reduces the chances that Altria can achieve a very profitable pivot away from cigarettes.

Despite the company’s overall success, there’s a reason the stock price is down 50% in the past five years and its P/E ratio is in single digits.

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