But MO still stands out for having the highest dividend yield of all S&P 500 stocks, at 9.5%. And it’s not an unreliable dividend either, with the company’s impressive 54-year history of consistent dividend payments.
In fact, over the past decade, investors’ money has nearly doubled thanks to lucrative dividend payouts, even though share price returns are only 6.4% over that entire period (see chart below ). However, will he be able to repeat the same performance over the next decade?
Progressive dividend policy
For starters, the company’s dividends look good, at least for the future. year. It clearly focuses on passive returns for investors. It states: “A strong and consistently growing dividend remains a top priority for us. “. To achieve the same objective, it aims for “a new progressive dividend objective which aims for annual growth in the dividend per share included in the mid-single digits”.
In any other case, I’d still doubt it, given its unsustainable dividend payout ratio of 114.5% for the year ending December 2022. But it has a track record to back up its promises. Over the past decade, its dividends have consistently increased each year (see table below). Its dividend yield has also remained rather healthy during this period, with the lowest year-end yield at 5.6% in 2017 and the highest at 10.5% in 2020.
Positive dividend outlook
Next year may not be any different. For one, over the trailing twelve months (TTM), its dividend payout ratio has cooled to 77.8%. This is supported by above-industry earnings growth. For the first nine months of 2023 (9M 2023), its reported diluted earnings per share (EPS) doubled (see table below) due to an income on investments in equity securities compared to a loss last year. Adjusted diluted EPS increased by 3.3% Also.
This alone sets the stage for dividend growth next year. And the company’s earnings outlook further confirms this. Even though the company slightly lowered its earnings forecast in its latest earnings update, it still expects EPS to increase.
Adjusted diluted EPS is now expected to increase in a range of 1.5% to 3% year-over-year, with the midpoint of the range now at 2.25%. This compares to the previous midpoint of 2.5%, for a growth range of 1% to 4%. In absolute terms, he expects this figure to be between $4.91 and $4.98.
Assuming dividend payments grow at the ten-year compound annual growth rate (CAGR) of 6.7%, next year’s payout would be $4.1 per share. This indicates an even healthier forward dividend yield of 10.2% compared to the TTM yield of 9.6%. This estimate is higher than analysts’ estimate by 9.8% on average, but it should be noted that even this lower forward yield is higher than that of TTM.
Question mark over dividend longevity
However, just because next year’s dividends look good doesn’t mean the next decade will be just as good. And this is because smoking is increasingly out of favor. Like British American Tobacco (RTC) estimatesThe global tobacco industry likely saw a 3% volume decline in 2023.
This is also evident in Altria’s numbers. For the first 9 months of 2023, net sales fell 2.5% due to weakness in the smokeable products segment, with cigarette shipment volume falling 10.5% (see table below). below). Not only do smokeable products contribute 91% of the company’s revenue, they are also essential to maintaining its profitability, accounting for 94.5% of operating profits.
This may place Altria in a particularly precarious situation in the future. While he smokes an alternative brand! experienced a 41% year-on-year volume increase for 9 months 2023, in absolute terms it remains a small contributor to total revenue. Additionally, the company abandoned its minority investment in Juul Labs after it was banned in the United States for what was characterized as fueling “Teen vaping epidemic“.
It did, however, acquire NJOY Holdings to build a position in the vaping market, but it remains to be seen how that will play out. As the chart below shows, its share of the US e-cigarette market is much lower than Juul’s.
Attractive market multiples
But for now, in addition to the dividends, the stock market multiples also seem satisfactory. Its TTM and forward GAAP price-to-earnings (P/E) ratios indicate the stock’s upside relative to tobacco industry average multiples (see table below).
There is reason for Altria to trade lower, as it is the only tobacco company to see revenue decline on a TTM basis. But what it lacks in revenue, it makes up for in profits. EPS has seen a whopping 90% increase over the past year, far surpassing the already healthy double-digit increase seen by three of its four peers.
On average, the P/E suggests that there could be a 25% share price increase in the future. But even a much smaller rise would still make it a profitable investment for now, considering dividends.
After that ?
The discussion clearly shows that over the next year there will be a good reason to buy MO. Not only will its dividends likely remain lucrative for investors, but there is also potential for higher prices. I would also extend this argument to the medium term, based on the information available so far.
However, bigger existential questions arise for Altria when looking at the long term, which takes into account the next decade. The contribution of non-tobacco products is so far limited and there is also no guarantee that they will succeed in the market of tobacco alternatives in the future.
I will opt for a Buy rating keeping in mind the short to medium term, long term investors better keep a close eye on the company’s developments as this party might not last forever.