Since my recent purchase of Cummins, as well as a second follow-on purchase that I will highlight in my monthly dividend income report, I’ve had new capital at the ready.
The two companies that I’ve been watching for an entry point were Cracker Barrel Old Country Store and Altria Group.
Unfortunately, both came within pennies of reaching my limit order over the last couple of days but did not execute. I’m a firm believer in not chasing the price and to remain patient for your desired price to be met.
Fortunately, that patience was rewarded today–and I obtained an even better price than my original target.
Background on Altria Group Inc.
Altria is most widely known as America’s largest tobacco company, with one of the most well-known brands of cigarettes–Marlboro–leading the charge. However, what some do not realize is that they also own roughly 10% of InBev ($BUD), which happens to be the world’s largest beer company.
In addition to that, they produce cigars, smokeless tobacco products, and wines.
With that said, smoke-able products remain the largest portion of their business and that does raise some concern as the number of people smoking has been in steady decline. In an earlier time, I was a smoker myself–and my brand of choice was Marlboro.
Altria Group was founded in 1919 and in the early 2000’s the company was split up into three resulting companies: Altria, Philip Morris International, and Kraft. As part of those spin-offs, Altria retained all domestic tobacco operations under the company Philip Morris USA. The company is headquartered in Richmond, Virginia.
There are plenty of investors that have chosen not to invest in companies like Altria given their primary business is focused on unhealthy products that can cause devastating health issues for consumers. I am not here to question that or debate how Altria aligns to one’s personal values, but definitely felt it was worth noting as I know some prefer not to invest in this type of company.
Altria by the Numbers
Earlier this year, Altria announced an unexpected dividend increase of 6% and most were eagerly awaiting August to see if they would maintain their track record of announcing their standard increase.
They did not disappoint.
With many expecting a second modest increase, Altria surprised with a 14.3% dividend increase–raising the dividend from $0.70/share to $0.80/share!
Altria maintains a long-term target of an 80% payout ratio, which is higher than I typically like to see but has been supported by their strong ability to generate a strong and consistent cash flow and balance sheet.
One thing that has been impressive with Altria is their consistency, as represented below by their dividend growth rate:
- 3-year growth of 8.3%
- 5-year growth of 8.3%
- 10-year growth of 11.3%
In addition, Altria is a Dividend Champion with a 49-year track record of paying an increased annual dividend. With their recent dividend increase, and based on my purchase price of $58.75, Altria is yielding 5.45%.
Quite impressive for a company with an S&P credit rating of A-.
Their most recent quarterly earnings, which were announced at the end of July, were $1.01 which beat EPS estimates by $0.01. However, they missed analyst estimates by $140M on reported revenue of $4.88B (~3.7% YoY decrease).
As mentioned, the decline in the tobacco space is a concern despite it having a history of being fairly recession resistant. My concern on that is mitigated by the alternate lines that Altria is involved with, and their continued efforts in the smokeless arena.
There is also some long-term speculation on what the legalization of marijuana could mean to a company like Altria, however I believe we are still years away from that even being a possibility therefore I do not account for that in my evaluation.
Adding to My Position
Altria was one of the companies that I originally purchased back in May when establishing my dividend portfolio, and believing that they are slightly under-valued at this point I have been looking to add to my position.
Earlier in the week, I had a limit order in for $59.25 and narrowly missed filling when the price declined to $59.26.
However, I remained patient and this morning the price dipped even farther and here is a summary of my order:
The 30 additional shares will add $96.00 in annual forward dividend income to my portfolio.
In total, this purchase brings my holding to 66.433 shares with an AFDI of $212.59.
Taking a look in F.A.S.T Graphs and looking at Altria over the last 10-year period, they are currently trading below their normal P/E ratio of 17.6. This signals to me that they are currently trading slightly below their expected value.
Altria has seen a considerable decline in 2018, however as noted in the chart above they were trading at an over-valued price for a number of years so that is not a huge surprise.
Looking at their historical and forecast EPS growth, one will see their ability to be consistent that I mentioned earlier.
There are a healthy number of analysts covering Altria, and as noted above their forecast is for continued consistent growth in earnings. Analysts are projecting slightly more than 9% growth over the coming two years.
One item that I want to highlight from this F.A.S.T Graphs chart is the Analyst Scorecard.
The Analyst Scorecard provides an overview of how accurate the analysts are with their forecasts on each company. We see below that the analysts covering Altria have been extremely accurate with their projections over both the 1-year and 2-year forward projections.
Assuming the analysts are correct, I am expecting Altria to return to their historically normal P/E and in the chart above I forecast what the potential return would look like with a slightly more conservative forecast.
If, and recognizing it is a big if because nothing is certain, Altria is able to return to a P/E ratio of 16.5 that would represent a total annual rate of return of 19.84%.
Summary
With the continued decline in tobacco use, there are certainly challenges ahead for Altria. However, it is important to remember that Altria is more than just a tobacco company–granted the majority of their earnings do come from tobacco today.
The management team at Altria has demonstrated that they are able to be consistent and have performed admirably over time.
The performance chart below shows Altria in comparison to the S&P 500, and you can see that with their steady dividend increases and overall performance they have done quite well with slightly edging the overall index.
By remaining patient, I was able to add to my position in Altria and with the fantastic 14.3% dividend increase, I am happy to see that annual forward dividend income growing!
What do you think about Altria?
Good job and yesterday’s raise was nice glad I own it also. I think in the long term they will be alright especially if they continue to diversify.
Thanks Doug, no doubt that they made a lot of people happy yesterday!
I don’t like the fact that they operate in a declining industry, but MO is my largest holding and has been for a long time even with the decline this year. Love the dividend increases this year.
Agreed, so far they have been able to hedge the declining industry with pricing power given they have the majority of the market share in the US with their brands. That won’t last forever so a lot will depend on the success of some of their other ventures.
For instance, I think if their iQOS product were to gain FDA approval in the US that might give them a boost (although I am not too sold on that). People are moving away from smoking but not necessarily nicotine (unfortunate for them, fortunate for shareholders maybe).
DivvyD –
Just nasty. Huge yield, incredible forward income. Just wow, congrats DD.
-Lanny
Thanks Lanny! The patience was rewarded with this one, both with that juicy increase and grabbing at a price better than my original target.
Great write up on your purchase, even though its a declining industry, it has been since like what… the 1950’s? MO manages to keep going strong! Hopefully they will capitalize on new opportunties when they arrise and stay the course. Congratulations on your purchase and added forward income. I myself am looking to add MO and PM too.
DI
Appreciate the feedback, and for stopping by DI!
In reviewing information while writing up this post, I recall seeing something like approximately 50% of adults smoked in the 1950’s and that is now down to around 15% as of a year or two ago. Given that declining segment, I don’t think they are a “set and forget it” holding as they will need monitoring to see if their fundamentals change considerably but that yield is awfully nice right now!
That’s a solid buy and insane forward income added to the portfolio. I was pleasantly surprised by the raise from MO as the raise came in $0.03 higher than I predicted, but I’ll take it. I was debating between adding to MO and ABBV last week. Ultimately, ABBV won out for me due to the better total return potential, but you can’t go wrong with either at current valuations IMO.
Thanks Kody! From what I recall you were one of the few that I saw predicting a double-digit increase so you weren’t too far off.
I can’t blame you for choosing ABBV, as if I didn’t have a full position in ABBV I would have been looking to add some as well.
Good buy in my view. I‘ve been looking at PM and MO for quite some time and have already built positions in British American Tobacco and Imperial Brands. There‘s a lot of pessimism with regard to investments in that industry, but I see tremendous cash generating machines, I am willing to take an exposure to 5 – 8 % of my portfolio in that sector.
Cheers
Thanks for stopping by and sharing your thoughts Financial Shaper! I’m right there with you but definitely feel there’s a need to keep an eye on things in case their ability to generate that cash flow starts to dwindle.
Hey DivvyDad! I made my first purchase in the tobacco arena just this past June when I bought MO. I was happy to see I’ve already received a dividend raise, too.
I like your purchase, and your analysis supports your decision to buy. I think you’ll be happy with the addition, but we’ll certainly need to keep an eye on the industry trends, as you mentioned.
Glad to see you’re a fellow shareholder ED, and with this plus my original purchase in May I am definitely happy to see that double-digit raise!
Yeah, some people prefer not to invest in the tobacco industry, yet the same people have no qualms investing in cannabis stocks!
I am happy with MO’s dividend increases this year and added just 8 more shares (I have no more contribution room in my RRSP haha, I think it is similar to a 401K?).
Yep, I will never question someone that prefers not to invest in a given company based on their values but sometimes those values seem at odds with one another.
You’re right that the RRSP is similar to the 401(k) here, although based on my understanding there are two huge advantages to the RRSP–you can carry over any remaining amount below the max to fund in the next year (with a 401(k) the contribution limit is a hard limit per calendar year) and you can withdraw money penalty free (with a 401(k) you will pay a 10% penalty if withdrawn before age 59.5 unless following certain rules). That can be a downer for early retirees, which is why I am building up taxable account now while maxing tax-advantaged accounts to help bridge us until “retirement age”.