Altria’s (MO) stock has come down in the past few days, but it’s still up for the year by over 5%. Does the recent dip offer a buying opportunity of this tobacco company? How is the company’s valuation measure up to its peers?
The big news from last week regarding the company’s decision to raise its dividend pay again by 9% is another boost to the demand for the stock. This came after Altria raised its yearly guidance to an average of $2.78 per share.
Following this news, the annual yield MO offers is around 4.3% and maintains its dividend payout ratio close to 80%. Even though the higher dividend pay will put a bit more pressure on Altria’s cash flow, it still seems the tobacco company isn’t likely to increase its debt burden.
The company along with Philip Morris International (PM) are also attempting to increase its operations with the e-cigarette. They joined forces to include to develop e-vapor products. The whole e-cigarette has been a bit of an elusive goal for Altria and has yet to result any major developments. It could be years until investors actually reap the rewards of this growing industry. And the hype over this issue may have, at times, driven up the stock price. But it’s still another issue that could eventually payoff.
In terms of its current valuation, despite the recent fall in the stock, driven by selloffs in the equity markets, Altria is still slightly higher than the average enterprise value-to-EBITDA ratio in the tobacco industry. The company’s current EV/EBITDA is at 13.4, while the industry average is 11.5. It may also seem the company’s valuation is higher than its international counterpart Philip Morris International with a ratio of 11.7. Further, other leading tobacco companies such as British American Tobacco (BTI) and Reynolds American (RAI) have higher EV/EBITDA ratios. Thus, the current valuation of Altria is becoming more attractive and perhaps if it dips again below $50, which will bring its EV/EBITDA to 13.
In conclusion…
The growing dividend pay, strong hold of the cigarette market in the U.S., and rising earnings are more than enough to keep holding on this stock. The opportunities over e-cigarette are present but could take years until they actually come to fruition. And its current valuation isn’t too high, but isn’t low enough to offer a buying opportunity. If the bearish market sentiment were to resume and prices across the board resume their descent; this could bring also more lucrative buying opportunities of this stock.
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