Dividend investing and Altria Group, Inc. (NYSE:MO) is nearly synonymous with many dividend investors. Many enjoy a prosperous retirement due to this company’s incredible historical track record. For the 52nd year consecutively, the corporation increased its dividend. The word “reliable” is an understatement.
The stock has sagged in recent years due to more than its fair share of losses, and dividend growth has been slower than in previous years. Altria is projected to continue growing at a slow pace for many years to come. This, combined with its high yield, will deliver double-digit returns for investors in the future. The company provides an appealing combination of current income and growth. It should be included in the portfolios of cautious dividend growth investors.
So there’s been a lot of negative news with this brand, but as I’ll explain below, bad news may become good news for investors who get in now. The market – and Altria – have already written off nearly the entire Juul investment, so there isn’t much more to write off. Suppose they can continue to do what they’ve always done in the primary industry while being reasonably successful in non-combustibles. In that case, investors should expect quite excellent returns in the future.
Historical Dividend Growth
More than five decades of uninterrupted dividend increase speaks much about this company’s dependability and excellence. For decades, investors have slept comfortably knowing that their Altria income will climb far faster than inflation, ensuring their retirement incomes.
The graph above depicts an increasing number of rises. It even increased the dividend twice in 2018, owing to tax decreases that year. The dividend was $0.61 five years ago. It is currently at $0.90, representing an annual dividend growth rate of 8.1% on average.
Value-destroying investments, such as the Juul venture, will inevitably show up in earnings and dividends over time, regardless of how much the adjusted EPS figure is changed. Fortunately, much of it is passed, and the write-down has occurred. The previous two years have dragged down the average since it increased the dividend by 4.7% last year and a meager 2.4% the year before.
Even though the payout ratio appears unpredictable above, I am not concerned. The payout ratio is in the safe area based on adjusted EPS, which the Board uses to determine the dividend. It was 71.4% in the previous quarter.
August Dividend Hike
The most crucial topic for investors is what will happen in the future. To that end, management reiterated its full-year forecast of $4.79-$4.93 per share for the fiscal year 2022, with a midpoint of $4.86. This corresponds to a growth rate of 4% to 7% from 2021, with a midpoint of 5.5%. If this occurs, EPS will expand at roughly the same rate investors have been accustomed to in previous years.
If we put on our somewhat more optimistic glasses, a rise of 5 cents per share would result in a 5.6% gain. This is at the midpoint, implying a still cautious 78% payout ratio assuming the business achieves this middle-of-the-road EPS in 2022. The Board does have more wiggle room, but I don’t anticipate them to go for the maximum potential amount for two reasons: 1. Nobody expects them to come up with a significant increase, and 2. There are a lot of unknowns in the macro economy and the cigarette industry, so it’s best to leave some wiggle room.
My forecast is for a quarterly dividend rise of 5 cents per share for a new quarterly dividend of $0.95.
Current Valuation
I always look at the firm and its fundamentals first, followed by valuation. But, before making an investment decision, I constantly consider pricing. I also like to compare it to peers to see whether the firm I’m looking at deviates significantly from the others. I picked two businesses with a large presence in the US market as peers: British American Tobacco (BTI, OTCPK:BTAFF) and Imperial Brands (IB) (OTCQX:IMBBF, OTCQX:IMBBY).
Regarding Price/Sales, Altria is the most costly, with Imperial Brands coming out on top. When we look at Price/Earnings, we get the same pattern, with Imperial being the apparent winner and British American and Altria equally valued. Finally, Altria won a category with its 7.9% dividend yield, just topping Imperial and defeating British American by a full percentage point. Last year, the situation was the opposite, indicating that Altria is a better purchase today than a year ago.
With P/E ratios in the low double digits, all these firms appear to be bargains. There aren’t many reliable firms that sell for less than ten times profits and pay a dividend of over 8% as Altria does.
Conclusion
For years, Altria has been plagued by negative news, the most recent being the FDA’s decision over Juul. That money, however, is water under the bridge; it has already been lost and is thus useless for investors considering going in now. Even modest growth in the future should result in double-digit gains when the almost 8% dividend yield is considered. The dividend is expected to grow by 5.5% in late August, adding a considerable amount to the already strong dividend yield. Conservative dividend growth investors should take advantage of this favorable buying opportunity to add Altria to their portfolios.
Featured Image : Megapixl © Tarheel1776
