Altria (MO) Rallies on an Upgrade as Income Investors Pile In

Shares of tobacco giant Altria (MO: Charts, News) rallied 3% yesterday, after UBS upgraded the company from "Neutral" to "Buy" with a price target of $36. Altria, the parent company of Marlboro, Virginia Slims and Parliament, was originally spun off from Philip Morris International (PM: Charts, News) in 2008.

Altria retained the company's domestic tobacco operations while Philip Morris controls its overseas business. Altria is also the former parent company of Kraft, which it spun off in 2007. In addition to its primary tobacco business, Altria also owns a 27.1% stake in alcohol giant SABMiller. Although the slimmed down Altria, with a market cap of $65 billion, is a much smaller company today, it continues to be a favorite dividend stock for income investors, with its hefty yield of 5.46%. The stock has a low beta of 0.43, and has risen 16.5% over the past twelve months. Daily Chart
Altria's dividend has steadily increased over the past 25 years. The company has a targeted dividend payout ratio of roughly 20% of adjusted earnings per share. Altria is also buying back stock on a regular basis to reduce its outstanding shares, ending the third quarter with 2.024 billion shares outstanding, down from 2.084 billion shares in the prior year quarter. Altria's aggressive plans to increase shareholder value are necessary to offset the company's decline in earnings per share from both the previous quarter and the prior year quarter. In the third quarter, Altria's EPS declined to 32 cents per share from the 60 cents it posted in the prior year quarter. Its EPS was negatively impacted by higher excise taxes and the retirement of older high interest debt. Some analysts have expressed concern regarding Altria's weak EPS, since its dividend payout ratio comes in at 99% over the past two years - suggesting that its dividend would be unsustainable. However, Altria's stake in SABMiller provides it with an additional $472 million of annual dividend income, which is not included in Altria's net earnings. With SABMiller's dividend income included, Altria's dividend payout ratio comes out at a more manageable 87%. Altria also has $13.88 billion in debt, up from $12.2 billion a year earlier. As its older, higher interest debt is replaced by newer, low interest debt, Altria's interest expense declined from $282 million to $278 million during the third quarter. Interest expenses are expected to decrease as a result of this shift. Fundamentally, Altria's stock is considered oversold, with a RSI (Relative Strength Index) of 29.5. Analysts generally consider a stock oversold if its RSI reading comes in under 30. Altria is also considered a safer investment than its international counterpart, Philip Morris, due to its lack of international exposure. Philip Morris recently posted a disappointing decline in third quarter earnings due to losses accrued in Europe, one of its most important markets. Philip Morris was also hurt by a strong U.S. dollar, since it reports earnings in U.S. dollars while generating its revenue in overseas currencies. Altria trades at 13.6 times forward earnings with a 5-year PEG ratio of 2.08, which signifies that although the stock is undervalued, its share price is unlikely to skyrocket anytime soon. However, Altria's constantly increasing dividend yield and steady price will continue to attract new income investors. Other News About MO Are These 7 Tobacco Stocks Worth Buying? Did Altria make the cut? With Its 5.7% Yield, Altria Is On Sale Is Altria's dividend yield the safest bet in the market? Other Stocks in the News Intel CEO Ottelini to Step Down in May Does the early resignation of Intel's CEO hint at trouble down the road? China's Role In Upcoming Surging Apple Sales Will strong iPhone and iPad sales in China revive Apple's lagging stock price? Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Nov 20, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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