The Run-Up in Altria Stock Isn’t Over Yet

Investors in Altria Group (NYSE:MO) enjoyed months of steady upside throughout much of last year, only to see the stock fall since November. But on Jan. 24, when the stock bottomed at $43.33 on the day, investors bottom-fishing appear to have started accumulating the stock, ahead of the dividend declaration.

Source: Peyri Herrera via Flickr (Modified)

Those not holding the stock have until March 22 to be a shareholder of record to earn an 80-cent quarterly dividend. So, what are the pros and cons of buying MO stock now after the stock’s 25% bounce from the bottom?

Dividend Income

The 6.05% dividend yield is a pro for holding Altria stock, especially when the payout ratio is 76% and grew 10.3% over the last five years. Even if political uncertainties questioning the sale of tobacco might damage future sales, the industry has a way of surviving such attacks. Despite Altria, British American Tobacco (NYSE:BTI) and Philip Morris (NYSE:PM) demonstrating its ability to continue on its business, Altria is diversifying its business. Very recently, it made a massive investment in a Canadian cannabis firm.

Indirect Exposure to Growth in Cannabis Market

Altria’s C$2.4 billion investment in Cronos Group Inc. (NASDAQ:CRON) gives shareholders an indirect equity exposure to the fast-growing cannabis market. Cronos said that the investment received would support its innovation in cannabinoid innovation. It also lets Cronos create differentiated products and brands of cannabinoid-based products for both the medical and recreational markets.

Altria paid a hefty price tag for gaining a quick entry into the cannabis market but it has to do so. If cannabis becomes a substitute for cigarettes or e-cigarettes, Altria would still benefit from the trend through its Cronos investment.

Investing in Juul

On Dec. 10, 2018, Altria shuttered its e-cigarette brands and took a charge of around $200 million. 10 days later, it announced a $12.8 billion investment in Juul, in an all-cash deal. Altria’s 35% stake is strategically similar to that of the Cronos deal. Instead of starting the business from scratch, it is investing in a popular and well-known product to broaden its business and to gain a partner.

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Risks in Altria’s Investments

Now for the cons of investing in Altria.

Altria already has a debt/equity of 1.74 times. And investing billions, essentially paying a generous premium in the hot market of both cannabis and e-cigs, comes with some risks. If these companies do not maintain their high growth rates, Altria may have to write-down its investments.

Competitors might follow suit by making similar investments, forcing Altria to do even more deals. Its cash balance will fall and the firm may need to raise debt to finance overpriced deals. By then, upset investors will be too late in voting out executives to change the company’s strategic direction of acquisition through growth.

Valuation

Altria is still trading at 20% below its yearly high. 9 of the Wall Street analysts have, on average, a ~10% upside price target at $58 a share (according to Tipranks). With the stock trading at around 14 times earnings, and a long-term EPS growth target of 7% to 9%, the stock’s PEG is as low as 1.55 times.

Over the last 9 years, from 2009 – 2018, Altria grew adjusted operating income by 5.1% while its adjusted OCI margins expanded by 13.3%. These strong historical numbers suggest that the company will continue to grow all of its businesses. Its big investments in e-cigs and cannabis may pay off in the long-run as these two markets expand.

Your Takeaway

Altria is actively embracing future opportunities for tobacco harm reduction. Its investment in Juul is evidence that it wants to sell products that do not make its customers unhealthy. With the e-vapor international opportunity at $6 billion in North America and $17 billion internationally, Altria cannot afford to be without an investment in Juul. It also needs to continue to offer innovative tobacco products. The combination of these product streams will diversify Altria’s income, which is net positive for its shareholders.

Altria stock is not yet back to the $60 – $65 range but it could get there this year if the company demonstrates steady earnings growth.

As of this writing, the author did not hold a position in any of the aforemen