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Altria: 8.6% Dividend Yield With 35%+ Re-Rating Potential

Published Sat, 02 May 2020 12:02:08 -0400 on Seeking Alpha

Altria reported mid-teens revenue growth and high-teens EPS growth in Q1 2020, helped by consumers "pantry loading" due to COVID-19.
The U.S. cigarette market further stabilised, with Altria's volume decline moderating to 5%, and the e-vapor category shrinking again.
While Altria withdrew guidance, this was partly due to its ABI stake, and it reiterated the commitment to the dividend (now at an 8.6% yield).
Altria's valuation multiples are the second cheapest among the tobacco Big 4, apart from the structurally-challenged Imperial Brands.
At $39.25, shares are likely to return more than 10% annually in the Base Case, and 45-70% over the next 12 months in the Bull Case. Buy.
We are reiterating our Buy rating on Altria (MO), having reviewed our investment case after Q1 2020 results released on Thursday. Since we upgraded our rating to Buy on February 1 ("Altria: E-Vapor Threat Reversed In Q4, Upgrade To Buy"), shares have lost 15.7% (after dividends), roughly in line with the S&P 500 index:
Librarian Capital Altria Rating History vs. Share Price

NB. Share prices as at the time of writing, as recorded in each article.
Source: Seeking Alpha (01-May-20).

Buy Case Recap
Our Buy rating is based on what we saw as an asymmetric risk/reward where:
In the Base Case, the near-term downside risk has receded, as the volume decline in Altria's core cigarettes business has started to decelerate with the U.S. e-vapor category reversing from growth to decline in Q4 2019 after a regulatory clampdown. Provided the annual volume decline is no worse than 5%, with rising prices and falling costs, EPS could grow at 2.5%+, and share price growing in line with it. This, combined with a high-single-digit dividend yield, gives an annualised return of 10%+. In the Bull Case, with investor sentiment on the cigarettes business improving and/or Altria achieving strong growth in Reduced Risk Products, the shares could... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
BRITISH AMERICAN TOBACCO 37.99   0.0 0.00 2.68 6.64
PHILIP MORRIS INTERNATIONAL 74.90   14.9 5.03 4.68 6.12
ANHEUSER-BUSCH INBEV 97.47   25.9 3.76 1.67 1.77
IMPERIAL BRANDS 27.17   0.0 0.00 0.00 0.00


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