Altria: a return of almost 9% with buybacks, the bulls break the downtrend (NYSE:MO)

Diversified investors haven't been rewarded much in 2024. While the S&P 500 is up more than 14%, including dividend, so far this year, value strategies and defensive sectors have generally lost ground against the SPX, with a strong technological component. During my weekend market research, I found that only information technology and communications services are growing on a relative basis compared to the S&P 500. Even utilities, which had attracted the attention of some AI alpha seekers, have fallen .

Consumer staples, meanwhile, are now in their worst relative position against the U.S. large-cap index since 2000. It's hard to say when the stock rally will truly extend, but I see value in some areas outside of high growth sectors. technology.

Altria (NYSE:MO) is an example. With steady EPS growth expected, very high free cash flow generation and a dividend With a trailing 12-month return of 8.8%, the stock looks fundamentally strong, although there is also reason for optimism on the chart. I have a buy rating on the large cap of $76 billion.

Relative sector strength: weakness in consumer staples

According to Bank of America Global Research, Altria Group is the parent company of Philip Morris USA (cigarettes), UST/Helix (oral tobacco), John Middleton (cigars), and NJOY, Inc (vapor). PMUSA holds 48% of the U.S. cigarette market, led by its main cigarette brand, Marlboro. MO also owns 8% of Anheuser-Busch InBev, the world's largest brewer. It holds a stake in Cronos Group (cannabis). In 2008, it sold its international tobacco operations to shareholders.

Last April, Altria reported a mixed set of quarterly results. First-quarter non-GAAP EPS of $1.15 was in line with Wall Street estimates, while revenue of $4.7 billion, down 1% from year-ago levels , was a very slight lack. Growth hasn't been particularly impressive, but it's expected to remain steady at least through the end of 2024. The management team expects current year operating EPS to be between $5.00 and $5.17, which was slightly above expectationswhich would represent an annual increase of 2 to 4.5%.

Additionally, the company implemented a $3.4 billion share repurchase program, creating an impressive total return for shareholders when combined with the dividend yield. Marlboro continues to be a strong point for MO. And following the 2023 acquisition of NJOY, its former rival, increased distribution of its products could help support sales in future periods.

But there are risks, including the obvious downward trend in cigarette volumes and competition from oral nicotine products. And regulatory concerns are still evident for companies in the tobacco industry.

On earnings, BofA analysts expect EPS to rise at a slow but steady pace over the coming years. Operating earnings per share of five dollars are expected to be achieved in 2024, with over $5.50 in non-GAAP EPS by 2026. The current Seeking Alpha consensus outlook calls for comparable earnings figures, while sales, currently at $20.7 billion, are expected to grow at a healthy pace. low single-digit clip over the next three years.

Dividends, meanwhile, are expected to grow about 3% per year, which could translate into a dividend yield of nearly 10% if the stock holds at current levels. And with a very high, sub-double-digit free cash flow yield, this dividend stalwart should have few, if any, problems continuing to increase its payout to shareholders. Finally, MO's EV/EBITDA ratio is about half that of the S&P 500.

Altria: Earnings, Valuation, Dividend Yield and Free Cash Flow Forecasts

Altria's current yield is historically high

After years of price stagnation, Altria now trades at a single-digit earnings multiple. The P/E of 8.7x is much cheaper than its 5-year average, and given the stable earnings numbers and high yield, the shares should offer at least a 10x multiple in my opinion.

If we assume $5.20 in non-GAAP EPS over the coming year, then the stock should be close to $52. Even using its long-term P/E, MO looks favorable in terms of valuation. And given the high yield, even a stock at its intrinsic value could be worth holding.

MO: compelling valuation metrics, strong free cash flow

Compared to its peersAltria sports a very impressive assessment Although its growth trajectory has been less than stellar, I wouldn't expect rapid earnings growth from companies operating in the tobacco industry.

MO, together with British Tobacco (BTI), has a profitability rating given high free cash flow and EPS, while its stock price dynamics has improved recently. Finally, the sell side has become more optimistic about the company's earnings prospects, with 10 upward EPS revisions compared to a single downgrade.

Competition analysis

Looking ahead, corporate events data provided by Wall Street Horizon shows a confirmed second quarter 2024 earnings date of Wednesday, July 31 from BMO with a conference call later in the morning. You can listen live here. July 10 is the next dividend payment date and be on the lookout for announcements of buyback plans since the current program ends on December 31.

Corporate Event Risk Calendar

The technical take

With a respectable valuation, a high dividend yield, and a bullish shift in analyst sentiment on Altria's earnings performance, the stock's technical view looks better than it did a year ago. Notice in the chart below that stocks are no longer trending down. A bear market, starting from a high of $57 just over two years ago, ended with a double bottom below $40 from October 2023 to last March. Since then, despite the tech sector's shine, Altria has rebounded strongly despite the pullback in recent weeks.

Resistance is apparent between $47 and $49, while support can be seen at the long-term 200-day moving average, which now slopes flat, suggesting that bears may relinquish control of the main trend in favor of the bulls. MO experienced two periods of heavy buying pressure – the first was a large volume increase in March, while the second was a series of up days in May before the recent pullback. But with high price volume between $41 and $48, the current area could be a consolidation zone for a while.

Overall, MO's downtrend has been broken and I wouldn't be surprised to see Staples stock meander. Of course, holders can collect the yield along the way.

MO: Downtrend broken, stocks paused at $48 resistance, 200 dMA slope bending positive

The essential

I have a buy rating on Altria. I consider the stock sufficiently undervalued, while its dividend yield of nearly 9% is attractive given the company's low free cash flow multiple. Its chart is also “fairly good” after a downtrend breakout earlier this year.