Tobacco giant Altria Group, Inc. (MO, Financial) slightly slumped on Thursday after trading at $62.43 per share. In early morning trading, the stock was up slightly to just under $63 a share.
The stock apparently is mimicking the general downturn characterized by U.S. equity markets. Altria Group has underperformed the S&P 500 index by 11%, signaling that the U.S. tobacco giant may have disappointed shareholders since the beginning of the year..
However, Altria is trading at one of its lowest over the last twelve months, offering investors a convenient entry point in one of the best tobacco companies in the world.
The current share price is over the 52-week low of $60.01 with only $2.42 per share and to the 52-week high of $77.79 per share. There is a sizeable 24.5% upside margin to take advantage of.
The current market valuation is also one of the lowest over the last two years of trading. That signals a good time to acquire shares of Altria Group.
Furthermore, the stock is trading plainly below the 200, 100 and 50-SMA lines. With a price-earnings (P/E) of 11.76 times, Altria Group is absolutely on par with its industry and as of today acquiring shares of Altria, you have the possibility to buy $1 of future earnings allocating $16.92 versus an industry median of 17.21 times.
The price-sales (P/S) ratio is 6.15 times. The industry median is 2.71 times. However, I expect this metric to improve on a trailing twelve months in the second quarter of fiscal 2018 period as a higher sales volume of cigarettes shipped in the first half of 2018 compared to the second half of 2017.
When the forward P/E ratio of 16.92 times is multiplied by $4.10, which is an average weighed EPS for full fiscals 2017 and 2018, it yields a value of $69.4 per share. This value so determined represents a more than 10% appreciation of the stock. Not to mention that for full fiscal 2019 analysts estimate an EPS that on average is $4.38, therefore, the appreciation can be even more on the years horizon. For full fiscal 2018 and backed by a figure of yearly revenue of $19.75 billion, the net profit is forecasted at $4.01 per diluted share of Altria.
Entering today, you also have the possibility to profit from a quarterly free cash flow distribution that after the company’s decision to hike it by 6.1%, is 70 cents per ordinary share of Altria Group. If held constant, it forwards to a nearly 4.5% yield that even though it is still a bit below the industry average of 4.68%, represents an 11.7% increase before the hike.
According to Altria Group’s news release the next quarterly portion of the company’s free cash flow will be dispersed on April 10 to shareholders of record March 15. The ex-dividend date is scheduled for March 14.
I also expect the market to positively process the dividend hike over the next days of trading. One more reason to buy Altria today.
The U.S. tobacco giant is a loyal dividend payer since it has regularly distributed the free cash flow to its shareholders over its entire history and has been surpassing the number of last yearly payments (49 years) with a higher number of hikes (52 times). This is a sign that Altria Group’s balance sheet is financially solid with almost $1.3 billion in cash on hand and security – besides the availability of line of credits – and with almost $4 billion in cash flow that the company can – after having satisfied its credit capital lenders – invest in the company for business growth purposes and to make its shareholders happy with the dividend.
Of course, Altria Group is still represented by the sale of cigarettes and cigars despite the mounting campaign against tobacco. From the sale of cigarettes and cigars, Altria Group makes about 85% to 90% of its total revenues and income.
The company boasts Marlboro in its portfolio of smokable products. Marlboro is the most known cigarettes brand in U.S. And, the company is also committed in advancing products that could be less harmful for smokers.
This is a responsible approach to the extent that the company is in constant talks with the U.S. Food and Drug Administration concerning the development of these surrogates of traditional smokable products.
Over time, Altria Group has also diversified its portfolio with investments in winery (Ste. Michelle Wine Estates) and in the equity of the largest brewer in the world, Anheuser-Busch InBev.
In addition, the company has more than ample resources for continuing with its buyback programs. Altria plans to buy back part of its own shares outstanding for a total amount of $1 billion. It plans to do that before the end of fiscal 2018. This means that at an average purchase price of $68.9 per share, calculated as a mean of the 52-week range, the U.S. tobacco giant may repurchase in the neighborhood of 14.5 million shares outstanding.
GuruFocus reports that about 1.9 billion shares of the company are outstanding. If the company decreases the amount of shares outstanding by 14.5 million, the positive impact on the adjusted EPS should be of 2.5 to 3 cents. That is a nudge towards the high limit of $4.03 of Altria Group's guidance on the adjusted EPS for full fiscal 2018.
Currently, Altria Group is paying part of its free cash flow out to its shareholders at a 70.62% rate of its adjusted net earnings per diluted share. Since the company has a target to increase this rate to 80%, the possibility for further hikes in the quarterly dividend - with subsequent stock appreciations - is very high.
Furthemore, with the company's tax rate going lower, Altria Group's earnings per share may increase more quickly than generally expected.This further enhances the chances of additional hikes in the dividend.
The recommendation rating on Altria Group is 1.9 out of a total of 5 and the average target price – as a mean of thirteen $65 to $85 per share ranging estimates – is $77.23 per share.
As of estimates for March 2018, a percentage of 57% of analysts is for a buy to a strong buy recommendation. I am with them.
(Disclosure: I have no positions in any security mentioned in this article.)
