Resist the Urge to Buy the High
Altria's Valuation has Never Been Worse
MO’s long-term holders, focused solely on making money, have had a nice run since the bottom of the market in 2009. In early 2010, the stock was still priced under $20 while sporting a 10.2x multiple and a juicy 7.64% yield.
The Fed’s ZIRP (Zero Interest Rate Policy) made MO even more addictive for income seekers as competing fixed income rates fell to record low levels. Wednesday’s trading saw MO make an all-time high since the spin-off of Phillip Morris International (PM, Financial).
So, “What’s the problem?”.
Altria has never been remotely as expensively valued as it is today. At $54.27 the shares trade for 21.3x the expected, but yet to be released, 2014 EPS and 19.4x Value Line’s projection of $2.80 for the year ahead.
Both numbers are well higher than MO’s 15.2x average multiple for the 2010 – 2015 period. Today’s 3.84% dividend might seem tempting but it pales beside MO’s typical yield of 5.54%.
Value investors should shy away from paying more than anybody else for the exact same merchandise. The smartest entry points (marked with green stars) came at P/Es of 10.2x – 14.2x along with yields from 5.79% - 7.64%.
Valuations, like stretched rubber bands, can temporarily expand but always return to their normal dimensions due to the powerful force of “regression to the mean.”
Phillip Morris International shareholders have experienced that unpleasant gravitational effect already. PM’s Jan. 21, 2015, close of $84.55 was almost $10 per share below where it sat at 2012’s pinnacle.
Those who refused to sell when PM was historically too expensive have wasted three years of a raging bull market.
Where would Altria trade if it reverts to a normal P/E? 15.2 times Value Line’s 2015 estimate would only justify a $42.56 target price. At the $0.52 current quarterly dividend rate a return to a 5.5% yield suggests even a lower number.
As of Jan. 17, 2015, Standard & Poors enigmatically carried a Hold rating on MO (from $53.05 per share) while calling fair value as $48.30. They saw $47 as a reasonable one-year expectation.
Morningstar was a bit more realistic, or perhaps pessimistic. They told investors to sell and calculated fair value as just $44.
Both research opinions are well within the stock’s 52-week range of $33.80 to $54.48. Paying an all-time high P/E while receiving the lowest yield in MO’s modern history is a recipe for bad returns.
Avoid being the chump who buys the high or fails to lock in gains before the stock falls back to earth. Altria’s smokin' hot run is likely to hit the ash can before long.
Disclosure: No position