Altria (NYSE:MO)

A relatively staid consumer staples business like Altria (NYSE:MO) may not gets investors’ hearts racing, but it offers investors multiple ways to win. Altria has a defensive, recession-resistant business. The company returns a significant amount of capital to shareholders, and the stock trades at a cheap valuation. These factors combine to make Altria an attractive stock, leaving me bullish.

A Defensive Business That Has Stood the Test of Time

Altria is a defensive, recession-resistant business. This $84 billion Virginia-based tobacco giant was founded in 1822 and has stood the test of time for over 200 years.

Altria sells cigarettes and other tobacco products in the United States and is best known for its Marlboro brand. Other popular cigarette brands in its portfolio include Parliament and Virginia Slims. Altria is also home to leading chewing tobacco brands like Copenhagen and Skoal.

Additionally, Altria sells on! nicotine pouches. These products are a key component of Altria’s plans to lead the transition toward a smoke-free future.

This is an economically-resilient business because customers who smoke tend to purchase cigarettes on a routine and habitual basis. For the most part, they are unlikely to stop buying cigarettes due to an economic slowdown. They are also unlikely to trade down from their preferred brand.

This gives Altria’s business a lot of stability, as evidenced by its incredible longevity and its slow-but-steady EBITDA growth in recent years. Altria was able to grow its EBITDA last year in an environment where many businesses were struggling with cooling consumer demand.

Altria’s Valuation is Resoundingly Cheap

Altria shares trade at just over 9 times 2023 consensus earnings of $5.01 per share, which is a steep discount to the broader market. For example, the S&P 500 (SPX) currently trades at a multiple of about 20 times 2023 earnings. I won’t argue that Altria doesn’t deserve some level of discount to the market, given that cigarettes are not a high-growth industry. However, this large of a discount seems too drastic.

Altria’s business isn’t just a melting ice cube. The company increased adjusted diluted EPS by 5% for Fiscal 2022 and expects to grow adjusted diluted EPS by another 3%-6% this year.

Altria has made some missteps in recent years, such as investments in Juul Labs and cannabis company Cronos (NASDAQ:CRON) that didn’t work out. However, at this point, these blunders are in the rearview mirror, and Altria seems to have learned its lesson. Management is focused on balancing returning capital to shareholders with building its smoke-free business. This seems like a sensible strategy.

A Dividend King with a Staggering Yield

Even if one wants to argue that Altria is fairly valued and that the share price won’t appreciate at all from here, Altria can still provide investors with handsome returns, going forward. This is because of its staggering dividend yield of over 7.9%. This monstrous yield is about five times the average yield for the S&P 500. It’s also more than double the yield that investors could get from investing in 10-year treasuries.

Not only does Altria pay out a large dividend, but it has also grown its dividend like clockwork for over five decades. The company has an outstanding 53 straight years of dividend increases under its belt. This shows the high priority it places on consistently rewarding its shareholders.

In addition to returning large amounts of capital to shareholders via its dividend, Altria also rewards shareholders with share repurchases. The stock just announced fourth-quarter earnings, and it unveiled a new $1 billion share repurchase program. Share repurchases can benefit shareholders because they reduce the share count over time and boost earnings per share. They can also be viewed as a signal that management thinks its stock is undervalued, and they provide support to the share price.

Is Altria Stock a Buy, According to Analysts?

Sell-side analysts are split on how they view Altria — one analyst views Altria as a Buy, while three call it a Hold, and two call it a Sell, resulting in a Hold consensus rating. The average Altria stock price target of $47.20 is about in line with where Altria shares trade today.

The Takeaway

I’m more bullish than the consensus due to Altria’s 7.9% dividend yield, its undemanding valuation, and its resilient business. Even if the share price doesn’t increase much over the next few years, receiving a 7.9% dividend yield like this over the course of several years can lead to a very solid return for investors over time. This compelling combination of dividends, share repurchases, and a cheap valuation offers investors multiple ways to win with Altria stock.