Is Altria a Good Dividend Stock to Buy?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cigarette stocks are notoriously high-yield, and Altria Group Inc (NYSE: MO) is certainly no exception. It has been paying 44 cents per share for the last three quarters, which annualizes to a dividend yield of 5.2%. The company has also steadily increased dividend payments over time, so it’s somewhat reasonable to expect Altria to raise its dividend even higher in the future. Altria was formed when Philip Morris split its operations into Altria, which focuses on the more mature American market, and Philip Morris International Inc. (NYSE: PM), and it currently has a market capitalization of $67 billion.

While revenue was up 3% in 2012 compared to the previous year, this followed a period of lower sales and as a result Altria’s revenue was actually about even with its 2010 numbers. However, the company has done well at cutting costs with the result being earnings which were 23% higher than in 2011 and 7% above 2010 levels. Certainly Altria is not a growth company, but it’s possible that it can squeeze margins a little bit more going forward. Cash flow from operations for the year came in at $3.9 billion, again higher than in the previous two years; with very little capital expenditures, Altria paid out $3.4 billion in dividends and repurchased $1.1 billion worth of common stock (financial activities generated more cash than usual, so cash balances showed little change). In the future some ground may have to give between dividends and repurchases but overall Altria’s ability to return cash to shareholders remains strong. Currently the trailing P/E is 16, and the stock not only pays a high yield but carries a beta of only 0.5.

Hedge funds generally invest more in line with a value thesis than an income one, but we still track a number of 13F filers with substantial positions in Altria as of the end of December. Gardner Russo & Gardner owned almost 7 million shares according to its 13F while the cigarette company was one of the top picks in Wintergreen Advisers’ portfolio. Adage Capital Management, which is co-managed by former Harvard Management employees Phil Gross and Robert Atchinson, increased its stake by 52% during the fourth quarter to a total of 2.5 million shares. We pay attention to hedge fund positions because our research has shown that imitating hedge funds' top stock picks has outperformed the market by as much as 18 percentage points per year.

Other cigarette companies include Philip Morris, British American Tobacco PLC (NYSEMKT: BTI), Reynolds American, Inc. (NYSE: RAI), and Lorillard Inc. (NYSE: LO). The latter two peers are also characterized by high yields- just a bit higher than Altria’s, in fact, in the range of 5.5%. The market cap is significantly lower in the case of both Reynolds American and Lorillard, however, and last quarter each experienced a decline in earnings compared to the fourth quarter of 2011. In Lorillard’s case the decline was very light, and it is cheaper in terms of earnings multiples so is still worth considering. We are more hesitant in the case of Reynolds given the combination of a substantial earnings decline, a smaller market capitalization, and only a small advantage on the dividend front.

Philip Morris International’s yield is 3.7%, so still quite good, and the international business likely has more growth prospects when we consider developing markets. Earnings were up 11% in the fourth quarter of 2012 versus a year earlier, though revenue growth was much lower and the stock trades at 18 times trailing earnings. That’s only a small premium, so while income investors are better off sticking with Altria those more interested in growth could look into how much of these earnings could be expected to continue. British American’s sales have been down; though net income has been up strongly in percentage terms, that may not be sustainable if revenue continues to lag and so we wouldn’t say that the business is in a particularly good situation. Its P/E represents a small discount to Philip Morris but its dividend yield is even lower at 2.6%. We don’t think it is a good stock to buy.

Altria Group seems to be quite an attractive dividend stock with a high yield, a history of increasing dividend payments, and somewhat stable financial performance to boot. We would want to compare it to Lorillard, which has a higher yield and a considerably lower earnings multiple- possibly providing a value case for the company as well- but at least recently has not been doing as well as a business.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in PM. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus