FotografiaBasica/iStock Unreleased via Getty Images

FotografiaBasica/iStock Unreleased via Getty Images

One of my very first investments as a dividend growth portfolio was Altria (NYSE:MO ). I bought my first shares in the company back in 2009, during the financial crisis after the stock price has plummeted. The stock back then was trading for less than $19. The company was just another battered consumer staples company back then when investors thought that the world is going to end as we know it.

In the 13 years since, the company has continued to grow, and reward its shareholders with growing dividends. Other stocks grew faster, but Altria was simply a reliable stock with a low beta, and high shareholder friendliness. In 2021, we have seen growth stocks imploding as the risk of interest increase has become more and more relevant. As the market environment is changing, investors should consider buying back to the same old value stocks, which tend to be "boring", yet give stable total returns.

In this article, I will analyze the company using my methodology for analyzing dividend growth stocks. The methodology is described in the graph below. I intend to look at the fundamentals, valuation, growth opportunities, and risks. I will take into account that past fundamentals may not be useful as the company went through significant changes.

Khen ElazarAccording to Seeking Alpha's company overview, Altria Group manufactures and sells cigarettes and oral tobacco products in the United States. It offers cigarettes primarily under the Marlboro brand, cigars principally under the Black & Mild brand, and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands, as well as provides on! oral nicotine pouches.

Revenues have been growing very slowly for Altria. The company is transforming at the moment from a cigarettes-only company to a more diversified business. It invests heavily in non-combustible products with additional investments in Cannabis and alcohol. During the period of transformation, revenue growth is slow, as the company is attempting to shift its clients. According to the analysts' consensus, as seen on Seeking Alpha, investors should expect low single digits annual revenue growth.

EPS has suffered over the last several years from write-offs to several investments during Covid. However, adjusted EPS is still growing at a mid to high single digits growth rate fueled by top-line growth, margin expansion due to price increases, and the company's buyback plan. The company is a cash cow, generating over $4 of cash per share, and this figure has more than doubled over the last five years. According to the analysts' consensus, as seen on Seeking Alpha, investors should expect mid-single digits annual EPS growth.

The dividend is the company's most well-known feature. The company has been growing the dividend for 52 years in a row, and the dividend is its priority. The current yield is enticing at 7%, and while the GAAP payout ratio looks scary, the non-GAAP payout ratio and FCF payout ratio are healthy, and below the company's own goal of 80% of adjusted EPS. Investors should expect 5-6% dividend growth in the medium term, which is in line with EPS growth.

The number of shares outstanding is also declining steadily. The company is constantly buying back shares with one exception during the uncertainty of Covid in 2020. The company is currently executing a buyback plan worth $3.5B with $2.5B left equalling 2% of the company's market and is expected to be done by the end of 2022. This will offer another boost for Altria's EPS, and I expect another buyback program to be initiated around Q4 before this one ends.

We have approximately $2.5 billion remaining under the newly expanded $3.5 billion share repurchase program, which we expect to complete by December 31, 2022.

The current P/E ratio is very low in my opinion. Paying 10 times that 2022 EPS of the company that pays a 7% dividend, and has significant brand recognition is an attractive offering. The transformation from cigarettes to smoke-free products is long and will continue in the foreseeable future. yet I believe that as the company keeps advancing other products, the current valuation is not here to stay.

The graph below is from Fastgraphs.com, and it implies how Altria is attractive at the current valuation. The company is trading 30% below its average valuation of 14. While the lower growth rate during the transformation justifies a lower valuation, the current valuation is very attractive for investors who seek reliable investments. Investors should expect P/E expansion, and while they wait, they have plenty of margin of safety.

To conclude, Altria is one of the bluest blue chips. Low beta, slow yet steady growth, and an incredibly reliable plan to return cash to shareholders. The company is transforming its legacy business into a more sustainable business in the 21st century. During that period growth has slowed, and the valuation is therefore very attractive at just 10 times 2022 earnings.

IQOS and On! are two non-combustible products that Altria is promoting. IQOS is so far sold in only four states, and the company intends to increase its presence in the foreseeable future as it refers cigarettes users to its lower-risk product. Altria also completed the acquisition of On! which has more than tripled its market share in the U.S. from 1% to 3%. These two products are the cornerstone of the non-combustible segment together with JUUL which is struggling to maintain its sales.

The IQOS team continues to refine its go-to-market approach for new and innovative products. Across the four states where IQOS is available, total Marlboro HeatSticks volume continued to grow with repeat purchases accounting for approximately 85% of sales.

Anheuser-Busch InBev (BUD) is another opportunity for Altria. The company has suffered from Covid, yet it keeps being a profitable cash cow. Altria enjoys the dividends and expects to enjoy capital appreciation in the future as the company recovers. The company enjoys a wide range of well-known brands of alcohol making it a good fit for a long-term investment. Moreover, Altria can also sell its stake and use it to pay off debt or return it to shareholders. This is a great opportunity as it gives Altria a very high level of flexibility.

Therefore, we continue to plan to maintain our ABI investment. We continue to have confidence in ABI's long-term strategies, premium global brands, experienced management team, and capability to successfully navigate near-term challenges. We will continue to monitor and evaluate market conditions and the analytical factors mentioned previously regularly, consistent with our goal of maximizing the long-term value of this investment for our shareholders.

Cronos (CRON) is another opportunity. The company is trading for a much lower valuation than it used to back in 2019, but the prospect of cannabis is still relevant. Altria has an option to acquire Cronos for a much higher price. The company though may still be an attractive target to complete the acquisition as it trades for almost its cash balance. Cronos is a lean cannabis company with low inventory and fixed assets. When the market and Altria are ready, it will be able to use its logistics and access to clients to sell these products more widely.

The first risk is the transformation. So far, cigarettes still account for almost 90% of the company's revenues. Its initiatives in alcohol, non-combustible products, and cannabis are still far away from being able to replace its legacy business. In addition, the company has made several bad capital allocation decisions as it acquired new future lines of business. It emphasizes how challenging this shift is from a capital allocation perspective even when the opportunity is real for the long term.

The regulation is another risk as it limits the company's legacy business as well as the company's future business. The FDA is tackling Altria on cigarettes, and it also tackles it on JUUL and other vaping products. The shift from cigarettes to other modified risk tobacco products (MRTPs) is not assisted by the regulator who wishes to limit the circulation of all products. Altria is experienced in dealing with the regulator, but it will still be a challenge and a risk going forward in this transformation.

Long-term debt is another risk. The company for years had balanced its long-term debt around $15B. In 2019, the company has assumed a significant amount of debt to fund its acquisitions of JUUL and Cronos. The company's new debt level. The higher debt level was not significant so far, yet the current business environment is changing, and interest rates will climb, and Altria will need to manage this debt more carefully.

The attractiveness of value stocks has been seen over the last year. 2021 signaled it with the Dow Jones meteoric increase, and in 2022 we may see it even more bluntly. Tech companies besides the largest ones, underperformed as investors bought shares in safer and reliable stocks. Altria offered in 2021 an over 25% total return, and as the uncertainty level is high, investors will seek havens that have proved themselves in the past, Altria included.

The company is growing while transforming. It is investing in a variety of businesses that will help it shift away from cigarettes. While it transforms, it rewards shareholders generously. This is your opportunity to buy shares in a company that during the last 20 years has seen its EPS decline only once, and it was 19 years ago, and enjoys a low beta and an attractive dividend.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of MO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.