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%.
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?