Although the Chinese economy reopened sooner than expected, and Europe registered an uptick in industrial activity due to a warmer-than-expected winter, analysts expect the global economy to witness a slowdown this year.
Moreover, with the Fed determined to keep raising rates in the foreseeable future and other headwinds acting to catalyze an economic slowdown, this decoupling between European and American markets is expected to continue in 2023.
Barclays strategists summed up the market scenario stateside by commenting, “The rally is losing steam in equities, while it is gathering pace in bonds. This is starting to resemble a classic recession playbook, with investors selling equities to buy bonds.”
In such a scenario, estimates of investment returns based on capital appreciation have temporarily gone out of the window. Hence, investing in dividend-paying stocks could ensure consistent income generation to endure a topsy-turvy market in the foreseeable future.
Altria Group, Inc. (MO) operates as a manufacturer and seller of smokable and oral tobacco products in the United States. The company offers cigarettes primarily under the Marlboro brand; cigars and pipe tobacco principally under the Black & Mild brand; and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands. In addition, it also sells oral nicotine pouches under on! brand.
MO’s excellent business performance has enabled it to achieve an impressive track record of returning capital to its shareholders. Over the past three years, MO’s revenue has grown at a 1.5% CAGR. During the same period, the company also registered EBITDA and net income growth of 1.1% and 38.6%, respectively.
The stock has gained 2.2% over the past six months to close the last trading session at $44.81.
Let’s closely examine the factors that make it worthy of investment.
Solid Financials
For the fiscal 2022 third quarter ended September 30, MO’s operating income increased 5.5% year-over-year to $3.11 billion. During the same period, the net earnings attributable to MO came in at $224 million, compared to a loss of $2.72 billion during the previous-year quarter.
As a result, the company adjusted quarterly EPS increased by 4.9% year-over-year to $1.28.
Consistent Dividend Payouts
On January 10, MO paid its regular quarterly dividend of $0.94 per share. The company pays $3.76 annually as dividends, translating to a forward yield of 8.39% at the current price, better than the four-year average dividend yield of 7.43%. It currently pays a substantial 76.63% of its earnings as dividends.
MO has increased its dividends for 53 consecutive years. The company’s dividend payouts have grown at a 7.7% CAGR over the past five years.
Excellent Capital Allocation by Management
MO’s trailing 12-month gross profit margin of 67.66% is higher than the industry average of 31.37%. Also, the company’s trailing-12-month EBITDA margin and net income margin of 60.06% and 22.71% comfortably exceed the industry averages of 11.14% and 4.12%, respectively.
Additionally, MO’s trailing-12-month ROTC and ROTA of 31.17% and 13.84% are significantly higher than the respective industry averages of 6.17% and 3.62%.
Optimistic Analyst Estimates
MO’s revenue and EPS for the current fiscal ending December 31, 2023, are expected to increase 1.5% and 3.9% year-over-year to $21.09 billion and $5.00, respectively. Revenue and EPS are expected to increase by 0.7% and 4.7% in the next fiscal year to come in at $21.24 and $5.24, respectively.
POWR Ratings Reflect Promising Prospects
MO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MO has an A grade for Quality, consistent with its impressive profitability.
MO is ranked #3 of 9 stocks in the A-rated Tobacco industry.
Click here to see the additional POWR Ratings for MO’s Growth, Sentiment, Momentum, Value, and Stability.
Bottom Line
To reinvent itself with changing times, MO has been explicit about its goal of Moving Beyond Smoking.
In pursuit of this goal, the company announced a strategic alliance with JT Group to pursue a global smoke-free partnership. The companies announced a joint venture for the marketing and commercialization of heated tobacco sticks in the United States. This would help MO tap a broader market segment that prefers smoke-free tobacco products to smokable ones.
Given MO’s solid fundamentals and future readiness, which support the company’s income generation track record and potential, it is expected to be a source of predictable and sustained returns in an unpredictable market, mirroring an uncertain macroeconomic climate.
How Does Altria Group, Inc. (MO) Stack up Against Its Peers?
While MO ranks third in its industry group and has an overall POWR Rating of B, which equates to a Buy, investors could also consider looking at its A-rated and B-rated industry peers: Japan Tobacco Inc. (JAPAY), Imperial Brands PLC (IMBBY), and Vector Group Ltd. (VGR).
MO shares were trading at $44.89 per share on Tuesday afternoon, up $0.08 (+0.18%). Year-to-date, MO has declined -1.79%, versus a 4.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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