Altria Stock: Offers High Margin Of Safety With Volatility

What goes up comes down. This is a guarantee in life as well in the stock market.

What goes down, comes up. This is not a guarantee and is, in fact, far from one. And that is what makes life and the stock market interesting and challenging. Not every person beaten down in life will find the courage to fight back and win. Not every beaten down stock can get some of its, if not all, mojo back. The reward is in betting on that right horse. We firmly believe Altria Group, Inc. (NYSE:MO) is one of those right horses.

It has been nothing short of a roller coaster ride for Altria’s investors this year. From handily outperforming the market in the first quarter to bad news and downgrades almost every single week since then. Nicotine related rumors. If not, JUUL rumors. Then the JUUL ban. Then the appeal by Altria. And a flurry of upgrades and downgrades on either side.

Morgan Stanley (MS) upgraded Altria yesterday in a rare bit of good news for the stock of late, but this has been promptly followed by a severe downgrade by Barclays with a price target of $36. Yikes! Yes, a 16% haircut from the recent closing price of about $43. Should the stock reach $36, that would represent a fall of nearly 37% from recent highs of $57. And the most earth-shattering news in the Barclays downgrade is that Altria is in a declining business. Duh. Welcome to 1980.

Predictions are hard, especially about the future. Math, on the other hand, may help clear some parts of the puzzle. Granted, even the numbers used are projections, but there is at least a way to adjust the model with numbers instead of debating around what may get banned or what may be appealed. This article presents a few basic numbers around three different scenarios:

• How will the numbers look should Altria go back to its 52-week high of $57?
• How do the numbers look at the current (and falling) price of $43?
• How will the numbers look if Altria gets “Barclayed” to $36?

We are bulleting these numbers out to get the attention they deserve. If the numbers get too detailed, don’t worry. A summary awaits at the end. Let’s do the math now.

• At the current 52 week high of $57:
  • Altria’s forward P/E will be around 11.75 with a projected EPS of $4.85. Now, one might argue that JUUL and inflation may eat into the EPS. Fair enough. Let’s slash the EPS by 20% to $3.88. Even then, the forward P/E of 14 seems reasonable compared to the still inflated overall market, especially Tech. A forward multiple of 14 for an industry leader that pays a handsome dividend and knows how to operate efficiently. I’ll take that.
  • Speaking of dividends, at $57 the stock would yield 6.30% based on current annual dividend of $3.60 per share. Once again, a very good yield that matches up fairly well with the outsized inflation numbers. Even assuming the worst, let’s say Altria slashes the dividend by 20% to $2.88 per share, the stock would still yield 5% if buying at $57.
  • To recap, even at $57 that seems an eternity away from here, Altria represents a fair value.
• At the current price of $43:
  • Altria’s forward PE is around 8.85 with a projected EPS of $4.85. The numbers are starting to look downright ridiculous already. Let’s again slash the EPS by 20% to $3.88. We arrive at a forward P/E of 11, which once again seems very reasonable.
  • Let’s move onto the dividend yield. At $43 the stock yields 8.37% based on current annual dividend of $3.60 per share. Let’s be moderate here and bet that Altria just retains the dividend instead of increasing as widely expected.
  • To recap, at $43 (and the stock is going lower pre-market), the numbers are starting to not even make sense anymore. Almost, “too good to be true” good.
• At the Barclays price target of $36:
  • Altria’s forward P/E will shrink to a “2009 Ford” like valuation of about 7 using the projected EPS of $4.85. Let’s give Barclays some weight here slash EPS by 30%. At an EPS of $3.40, the forward PE will be barely in double digits at 10.60.
  • Let’s also slash Altria’s dividend by the same 30% to $2.52. At $36, that will represent a yield of 7%.
  • Now, if Altria manages to raise its dividend as projected here to $3.80 per share, the yield will be a mind boggling 10.55%. This handily beats even the inflation protected Series I Bonds that now have a yield of 9.62% (through October 2022). A stock yielding more than inflation protected bonds with a realistic capital appreciation and dividend growth potential. And one with the pedigree when it comes to investor focus. Sign me up.
  • To recap, even at $36, Altria gets into the “back your truck” category.

Summary and Conclusion

What do these number tell you? To quote Benjamin Graham, margin of safety. At $57, Altria was/will be a moderate investment. At $43 and below, it is an attractive investment. At $36, it becomes a “sell your neighbor’s house and buy” investment. Notice, we used the word “investment” in all three scenarios. Things will be volatile as long as the current administration is in power. Expect the general market weakness to add more fuel to the fire. Expect analysts to surprise us along the way. But we still believe the stock will be a good long term investment despite well known headwinds. Let the magic of compounding and low expectations do their wonders. Don’t be your own worst enemy.

Disclaimer: Please keep the pros and cons of smoking and the politics out of the comments stream. This article does not endorse smoking and is merely the author’s thoughts on Altria as an investment vehicle.