Companies and Brands

Altria Stock's Attractive Value Proposition Going Into Earnings

Chris Lange

Published: April 28, 2020 12:59 pm

Altria Group Inc. (NYSE: MO) has carved out a niche in the United States as one of the biggest producers of cigarettes and smokeless tobacco products. It is a somewhat controversial industry, but this is the nature of the product. What’s not as controversial is the value proposition that Altria stock is offering investors in this recession.

The Dow Jones industrial average, S&P 500 and Nasdaq have all pulled back significantly from their all-time highs in February since the beginning of this pandemic. Now it looks like a bottom is in place, with the markets bouncing off their lows in mid-March.

Although there is a lack of certainty regarding where the markets will go from here, and when there will be a full reopening of the economy, for the most part the stock market is moving in the right direction.

Some companies are recovering more quickly than others, and then some, like Amazon, are hitting all-time highs. Altria is making its recovery in a more roundabout way. Its stock bottomed out at $30.95 per share and then quickly recovered to around $36. Although Altria shares are higher since then, it appears that the market is still trying to find the proper valuation for this tobacco giant’s stock price and its sizable dividend yield.

With earnings just around the quarter, more will be made clear to investors about where this company stands.

Recession Proof?

As we have mentioned before, cigarettes have long been considered “recession proof” due to their inelastic nature and addictive properties. However, this recession may prove to be somewhat different, considering the health risks that are on the table.

COVID-19 presents some interesting problems for people who habitually use tobacco products. Because the novel coronavirus affects the respiratory system, smokers are some of the most at risk. Tobacco use can be detrimental to the immune system overall.

As for the actual company, not necessarily the product, Altria offers an interesting value proposition: stable cash flows, a decent balance sheet and a high-yielding dividend. For the 2019 fiscal year, Altria paid $6.07 billion in dividends and repurchased $845 million in common stock. Retained earnings still amounted to $36.54 billion.

Although Altria recently has faced difficulties with its Juul investment, the company is actually in decent shape. The balance sheet at the end of 2019 showed $2.12 billion in cash and cash equivalents, no short-term debt and $23.58 billion in long-term investments (including the Juul impairments). Long-term debt totaled $27.04 billion, and cash flow from operations totaled $7.84 billion.

It’s no surprise that the dividend also has helped to support this stock. As long as the dividend continues to produce a high yield for investors, Altria’s stock will have some degree of security.

More investors have been flocking to companies with strong balance sheets, high-quality assets and strong dividend yields. Altria might be two out of three, but this is enough to provide investors with solid value.

Earnings on Deck

Altria is scheduled to release its most recent quarterly results this week, specifically on Thursday before the opening bell. This company has weathered the COVID-19 pandemic well so far, but this quarter’s earnings report will shine some light on how quarterly sales have fared and what the future of its dividend might be.

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Over the past few years, revenues have steadily increased, as have gross profits. At the end of 2019, revenues totaled $19.80 billion with $12.71 billion in gross profit, compared with $19.63 billion in revenue and $12.25 billion in gross profits in the previous year.

It’s possible that sales will take a dip this quarter, due to a couple of factors. First and foremost, health concerns surrounding a highly contagious virus that affects the respiratory system are enough to scare some consumers into putting down cigarettes. At the same time, cigarette companies have lowered their prices to drum up more demand, and while this could encourage more sales, margins and the bottom line will take a hit.

Then again, if cigarettes are truly “recession proof,” this crisis may see more consumers doubling down and buying more or even branching out to smokeless products. First-quarter results should clear the air for investors.

Looking ahead to the first-quarter report, analysts anticipate $0.98 in earnings per share (EPS) and $4.61 billion in revenue. That compares to last year’s numbers of $0.90 in EPS and $4.59 billion in revenue.

In terms of its dividend, investors can look for an update in the earnings report. The board of directors previously announced a regular quarterly dividend of $0.84 per common share would be payable on April 30 to shareholders of record as of March 25. The current annual dividend yields about 8.7%.