Altria Earnings: Far From A Dividend Trap

Investing is part emotional and part reasoning. Now, which part is dominant you may ask. It varies for every individual. But one thing for certain is that with both emotions and reasoning, people differ. Hence it is not surprising that investment decisions and articles about investments have at least two, if not more, sides. As a platform, Seeking Alpha blends in nicely here by allowing authors to disagree and voice their differences, in a professional way, of course.

By now, you likely have guessed that this article is a rebuttal. Yes, it is. A recent article on Altria Group (NYSE:MO) caught our attention. The disagreement starts right with the title. "Avoid" and "value trap" are not words that spring to most people's minds when talking about Altria as an investment vehicle. Sure, the stock is up about 16% YTD while the S&P 500 is down 12% and the easy gains (on paper for most) may have been made in the short term. But does that make Altria a "dividend value trap"?. Most definitely not. We offer three reasons to back this up.

Recent Market Trend

One reason we believe Altria will continue being sought in tough market conditions is it has what (ironically) seems like a rare combination: a long-lasting company selling real products making real profits irrespective of macro conditions. With the Federal reserve not pumping money into the economy, the debt-ridden concept companies are now fighting to survive while Altria is suddenly getting a tad of respect from Mr. Market. A long-due recognition in the first quarter of 2022 does not make this stock over-valued nor a value trap. Despite the strong outperformance YTD, Altria's forward PE is 11. To put that into context, Netflix (NFLX) has a forward PE of 17 today after a 75% fall from this 52-week high. Obviously, this is not an apple-apple comparison and NFLX will run harder when things improve fundamentally and on the Macro side but it comes with the heavy downside as we've seen this year.

In short, if not for Altria already being our largest position, we'd gladly add here at $55 with a PE of 11 while getting a 6.50% yield.

Pricing Power

Something else missing from the article linked above is Altria's pricing power. Not many companies can pass on their added costs as easily as Altria can and does. Basic Economics teaches us the difference between elastic and inelastic products. Tobacco, along with prescription drugs and basic utilities, is at the top of the list when it comes to inelasticity, which means the demand will not go down by the same factor that the price goes up by. Selling an addictive product with brand recognition, Altria is in an enviable position when it comes to pricing power. Regular but small price increases like this and this never make it to the mainstream headlines and are small enough for the average consumer to feel much of a pinch. But they add up to pretty millions for Altria each quarter.

Dividend Pedigree

The following points counter the notion that Altria is a "dividend value trap":

• The "high" dividend of $3.60 per share is covered handily by the projected earnings per share of $4.84. That's a payout ratio of 74%.
• Altria has a stated policy of paying out about 80% of its earnings as dividends.
• Altria's pedigree as a dividend growth stock (right from the days of being "Philip Morris") is top-notch. As the "new" Altria Group from 2008, the company has increased its dividends from 29 cents per share to 90 cents per share. In other words, the dividend has more than tripled in 14 years despite the perennial concerns about declining volume and regulatory impact.

Q1 Earnings Recap

Just as we finished typing the rebuttal above, Altria's Q1 numbers have been released. The following key points add to the arguments above in favor of Altria:

• EPS beat by 3 cents while revenue missed by $60M (which is about 1% based on the reported revenue of $4.82 B).
• 2022 EPS guidance remains strong with a range of $4.79 to $4.93. This range represents a growth rate between 4% and 7%. Bear in mind when Altria says this is the range, this will almost definitely be the range and the downside is fairly limited. Add the 6% dividend yield to the ~5% growth rate above, you get a double-digit annualized return on your investment.
• Altria continued purchasing its shares in Q1, retiring 11.3 Million shares at an average price of $50.69. The company still has $1.2 Billion remaining from the previously authorized $3.50 Billion to be used by this year. So, expect Altria to act quickly on any weakness in its share price and make prudent use of the remaining $1.2 Billion.
• Net revenue remained steady in the core business, with the slight decrease in revenue primarily attributed to the sale of Ste. Michelle Wine in 2021.
• Altria continues to write down the value of its JUUL investment (rather, call it a disaster) and any negative overhangs from JUUL should be almost immaterial going forward.

Conclusion

Not everyone looks for triple baggers which may eventually get cut down by 75% during downturns. Not everyone (over) pays for concept stocks and companies that they understand nothing about. Mr. Market may be irrational at times (for longer period of times) but the excesses almost always adjust. Stocks like Altria may not be the flavor of the month when things are rosy but they sure offer security during turbulence. If anyone is aware of more such "traps", please sign us up!