Summary
- Altria's EPS and DPS growth is set to continue.
- Prudent estimates project double-digit returns even if the valuation remains low.
- The current well-covered yield of 8.1% and the potential for a multiple expansion provide a generational opportunity.
Altria (MO) is a polarising stock. Some praise its historical income generation, while others expect it to go bust as a result of the long-term trend decline in cigarette consumption. With a negative market sentiment overshadowing the company, shares have suffered a consistent decline over the past three years, resulting in a current forward P/E ratio of just 9.5. In our view, Altia's current price of $40.69, offers a generational opportunity, with market-beating expected returns. Let's break this down.
In this article, we will:
- Establish why Altria's revenue and EPS growth are not over
- Reassure investors of the dividend's safety and its growth
- Project future returns that point towards a CAGR of 12.6%
- Discount future cash flow to prove undervaluation
- Conclude on why Altria is a great stock to buy right now
The growth is not over
The tobacco sector has been criticized for its lack of growth and the long-term decline when it comes to its demand. However, Altria's revenues provide another perspective. The 3-year and 5-year year CAGR in terms of revenue growth is 1.8% and 2.4%, respectively. It may be true that there is a minor decline in sales volume, but Altria's strong pricing power ensures that the top line is maintained, if not grown slightly.
In other sectors, it would maybe make sense to focus on revenues, as potential future earnings are more important than the current ones. However, the tobacco sector is one where cash flow and profitability maximization is the most shareholder-friendly result. For a couple of quarters this past year, EPS materially suffered as a result of the impairment of JUUL and higher interest expenses. However, since its split with Phillip Morris (PM), Altria has been consistently improving its EPS, effectively more than doubling it over the past decade.
