Reader Request - Altria Group Inc (NYSE:MO)
8 August 2007Dividends Matter reader David has requested that we have a look at Altria Group Inc which trades on the NYSE under the symbol MO. Let’s see if David has found a candidate for our portfolio of superior dividend yielding stocks.
Company Profile:
From Yahoo Finance
Altria Group, Inc., through its subsidiaries, engages in the manufactures and sale of cigarettes and other tobacco products in the United States and internationally.
Market capitalization is $ 145.59B and employs 175,000 people.
Company Fundamentals:
Right from the start, I can see that Altria’s management has done a superb job by generating a consistent return on invested capital of 21.4% over the last 5 years. In fact, just about every single year is over 20% in the last 10 years (19.7% in 2005). This is an excellent track record.
And return on equity has also been amazing. Unfortunately, it has been on the decline. The 10 year average ROE is 45.1% and the 5 year average is 35.14%. Last year’s ROE further declines to 28.16%. Still an excellent ROE, but the trend is a bit disconcerting.
The equity growth rate has been fairly consistent over the last 10 years. The 9 year average rate is 14.72%, the 5 year rate is 17.31%, the 3 year rate is 15.3% and last year’s equity growth rate was 10.27%.
The earnings per share growth rate has not kept up with the equity growth rate. The 9 year average EPS growth rate is only 6.93%. The 5 year rate is 5.12% and the 3 year rate is 4.74%. Interesting that the equity has been growing faster than the earnings per share.
Sales growth rates are almost non existent. The 9 year average is 1.93%, the 5 year average is 0.51%, the 3 year average improves to 5.29% and last year’s sales growth rate was a mere 2.04%. This is not surprising considering the industry that MO is in.
Dividend Fundamentals:
The current dividend yield is 4%. This is above average and handily beats the S&P 500 Index and the DJIA index for their dividend yields.
Dividend growth rate has been steady as a rock. Each and every year over the last 10 years has come in at around 8% - 9%. The 9 year average dividend growth rate is 8.72%, the 5 year rate is 8.2%, the 3 year rate is 8% and last year’s dividend growth rate was 8.5%.
The dividend payout ratio has been slowly climbing from 50% in 1997 to the current 62%. I assume that MO will continue to raise their dividend payout ratio as they continue their history of raising dividends.
Cash flow growth rates have been in the 5% range over the last 10 years with a 9 year average of 5.96%.
Valuation Models:
Let’s use my 3 valuation techniques to determine a target price for this company.
From a dividend yield perspective, you would think that the current 4% would be at the high end of the dividend yield range. In fact, it is below the 5 year average low dividend yield of 4.26%! The 5 year average high dividend yield is a eye popping 6.54%. In fact, the 10 year average high dividend yield is consistent at 6.72%.
If I demand the 10 year average high dividend yield, then my target price is $41.10. At the current price of $68.98, Mr. Market is currently demanding a premium of 67.85%! The dividend yield does not look as attractive now.
Benjamin Graham would be in complete agreement. The Graham number works out to $45.36 which means a premium of 52% over the current price.
Using the discounted present value method, I came up with a model price of $66.63. But in fact, this target price does not make sense because I demand a consistent dividend yield of 6.72% and a future dividend growth rate of 8%. However, in order to get that initial dividend yield, I should only be willing to pay $41.10 as calculated by the dividend yield method.
See my MO calculations.
Here is the 1 year stock price chart:
As you can see, MO has been over our target price for the entire last year.
Conclusion:
Although the 4% dividend yield is attractive, it is in fact a very low yield for Altria Group Inc. And depending on your outlook for tobacco sales in the future (which over the last 10 years has been almost non existent), I am not sure that I would consider MO a candidate for a portfolio of superior dividend yielding stocks.
What are your opinions?
Full Disclosure: I do not own any shares in MO.
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on August 9th, 2007 at 3:46 pm
I just found your article on FeedTheBull. You have an awesome article. I really love the approach you have taken to value Altria. Too many times people get emotional and buy in and out of a stock because it is popular or is doing well, but I can tell that you have really done your homework and making a decision based on your findings, not what the market is doing. Keep up the great work.
on August 9th, 2007 at 8:40 pm
Thanks for the compliment. Much appreciated.