Should High Yield Altria Be In Your Portfolio?

Altria Group (NYSE:MO) is a hard stock to own because of its underlying business, but a lot of people still do. The main reason is the massive amounts of cash the tobacco industry brings in and the whopping 8.2% dividend yield the stock is currently paying. If you think the dividend is too high and a red flag, think again.

This company is in business for two things, and one of them is paying dividends. The long-term objective is to pay out 80% of the earnings, which means a double tailwind for dividend growth. One of those tailwinds is the current payout ratio. At 76% of the adjusted EPS, it leaves room for increases. The other is earnings growth. The company is expecting earnings to grow over time and fuel dividend growth in a sustainable manner.

The JUUL investment is a concern but does not have a looming impact on the dividend outlook, although it will mean a loss for the company. The company has been writing that investment down almost since it was made and is well-prepared to move on should JUUL be banned from selling its current product line. The main takeaway from the situation is that Altria has out regarding the non-compete clause and could move on to some other vaping technology within the next few years.

Altria Gives Mixed Results, Maintains Guidance

Despite ongoing challenges with input costs and supply chain disruption, Altria had a decent quarter. The company reported $5.37 billion in revenue, down by 4.1% over last year’s stimulated quarter and missed the Marketbeat.com consensus, but that’s the worst news. The miss is slim at only 90 basis points and easy to overlook given the 10% gain posted last year. On a segment basis, the smokeable segment declined by 2.9% on a decline in shipments offset by higher pricing, while the oral segment declined by a slightly more robust 4.0%.

Another mitigating factor is earnings. The GAAP earnings were down significantly versus last year but include write-downs and the loss of investment options related to Cronos. On an adjusted basis, which excludes items that did not impair cash flow, earnings came in at an adjusted $1.26, which is up $0.03 YOY and a penny better than expected which is what ultimately counts. Turning to the guidance, the company expects earnings growth to accelerate in the back half of the year and reaffirmed its guidance of $4.79 to $4.93 in adjusted earnings. That compares favorably to the consensus of $4.83 and provides a relatively easy bar for the company to beat.

Altria Buys Back Shares, Too

Altria sweetens its capital return program with share repurchases as well. The company bought back 10.1 million shares for $507 million during the 2nd quarter and still has $750 million left on the current authorization. The company says it will use the $750 million by the end of the year, which means shares worth about 1% of today’s market cap will be taken off the market. Regarding the balance sheet, the company carries quite a bit of debt, and there is some concern about stockholder equity. Still, execs are working to correct those issues by paying down debt in a manageable way.

The Technical Outlook: Altria Tries To Rebound

The price action in Altria dived on the latest JUUL news but appeared to have hit bottom already. The stock found support in the low $40s, consistent with prior support levels over the last few years. Looking at the chart with a long-term perspective, the failed investments in Cronos Group (NASDAQ:CRON) and JUUL have the stock trading down at the lowest levels in years and offering not only value but yield. While there are still hurdles ahead, it looks like a total loss on JUUL is all but fully priced into the market so the downside risk is limited and there is still an opportunity in both vaping and cannabis.

Altria Stock Chart.

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