With a rich history dating back more than 200 years, Altria Group Inc. (MO, Financial) is one of the largest global producers of tobacco. It is also what I consider a perfect example of a myopic investment, meaning that by focusing on just one or two fundamentals metrics and ignoring all others often results in investors not making the best decisions.
In the case of Altria Group, the high dividend yield and very strong economic moat hide deeper problems. For instance, the Virginia-based company has a high level of debt, weak revenue growth and negative shareholder equity.
A strong economic moat and a high dividend yield
Starting with the positive attributes, Altria Group, formerly known as Philip Morris Companies Inc., is a multinational corporation with several factors that contribute to its competitive business advantage.
First, Altria owns a portfolio of well-known brands, including Marlboro cigarettes and Black & Mild cigars . These brands have established a loyal customer base over many years, and their popularity and reputation act as a barrier of entry for potential competitors.
Further, the tobacco industry is highly regulated. As a result, the stringent regulations imposed by governments create significant barriers for new entrants. Altria Group, with its long-standing presence in the industry, has the resources and expertise to navigate and comply with these regulations effectively. This gives it an advantage over new competitors who may struggle to meet the regulatory requirements.
Altria also has an extensive distribution network, which enables its products to reach a wide range of retail outlets. This network has been built over many years and is difficult for new entrants to replicate, providing a competitive edge. As one of the largest tobacco companies globally, it benefits from economies of scale. The company's size allows it to achieve cost efficiencies in production, marketing and distribution, which can be challenging for smaller competitors to match.
Finally, the company has expanded its business beyond traditional cigarettes into other areas, such as smokeless tobacco, cigars and e-cigarettes. This diversification helps mitigate risks associated with declining cigarette consumption and allows the company to tap into different market segments. It is worth noting that the tobacco industry, while enjoying certain competitive advantages, also faces various challenges, including declining smoking rates, increasing regulation and public health concerns. These factors can impact the sustainability of Altria Group's economic moat over the long term.
Shares of Altria Group trade with a price-earnings ratio of 13.96 and a price-sales ratio of 3.78, offering a high dividend yield of 8.66%. It is notable that the company has recorded 13 consecutive years of dividend increases. As of 2022, the dividend compound annual growth rate was 7.70% for the past five years and 8.03% for the past decade.
Investors who prefer income generation via consistent and growing dividends will love Altria Group for its solid dividend history. This is the point where the myopic investment concept starts to occur.
The stock has lost around 5% in 2023 and has remained fairly flat over the past year, recording minor gains of 0.05% as of the closing bell on June 23. Having high inflation in the U.S. over the past year means the real dividend has not been great compared to its nominal value. It is like the real and nominal interest rates. For instance, receiving an interest rate of 4% for deposits and high inflation of 6% means the real return is -2%. The good news is consumer price inflation in the U.S. declined to 4% in May, which was the lowest since March 2021 and slightly below market expectations of 4.1%. However, from July 2002 through January 2023, consumer price inflation was consistently above 6%.
My point is that a vast majority of Altria's dividend yield has been deteriorated by the high inflation rate.
Negative valuation metrics
Looking at valuation, the GF Value Line indicates the company is fairly valued currently based on historical ratios, past performance and analysts' future earnings projections.
Further, the GF Score of 78 out of 100 suggests it should generate an average performance going forward. While the company received high ratings for profitability and momentum, the financial strength, growth and value ranks were more moderate.
However, I focus mainly on two financial metrics: the debt-to-equity ratio of -6.55 and the three-year revenue growth rate of 2.7%. The company also has negative shareholder equity, which has been the result of large dividend payments, lower retained earnings and excessive debt.
The shareholder equity shows the number of assets remaining after subtracting total liabilities from total assets, which is also the company's net worth in the scenario of it going out of business. In the case of Altria Group, this net worth is negative.
Further, he dividend payout ratio of Altria Group Inc is 1.20, which is too high. At some point, the company will likely have to reduce the payout ratio and repay its debt.
Revenue growth is also a concern, not only for the past 12 months as mentioned above, but also because the future total revenue growth rate is expected to be 0.35%. The three-year free cash flow growth rate is 3.2%, which is positive but not fast enough to pay off debt or keep the high dividend yield over time.
Final thoughts
Shares of Altria Group have few growth prospects, are fairly valued and the company has a high level of debt and negative shareholder equity. The dividend yield is simply not enough to consider the stock attractive based on these factors.
