Investment Jungle

The search continues for a wonderful business paying solid dividends. Next up, the Altria Group (MO) which is the parent company of Philip Morris International.

Company Profile:

From Yahoo Finance:

Altria Group, Inc., through its subsidiaries, engages in the manufactures and sale of cigarettes and other tobacco products in the United States and internationally. The company sells its tobacco products to wholesalers, large retail organizations that include chain stores, and the armed services, as well as distributors, wholesalers, retailers, and state-owned enterprises. It also engages in the manufacture and sale of packaged foods and beverages, including canned meats, tomato, fruit juice, snacks, cheese and dairy, grocery, and convenient meals. The company sells its products to supermarket chains, wholesalers, super centers, club stores, mass merchandisers, distributors, convenience stores, gasoline stations, drug stores, value stores, and other retail food outlets. It also offers direct finance leasing services, primarily in transportation, power generation, and manufacturing equipment and facilities. The company was founded in 1919 and is based in New York, New York.

MO is a large cap stock with a market capitalization of $147.21B. It also has an S & P Stock Rank of A+.

Financial Analysis:

Looking at the ROIC, management is doing an amazing job! The 5 year average ROIC is a whopping 35.14%. And the 10 year average is an outstanding 42.11%!

The Equity growth rate causes me concern. It has been steadily dropping over the last 4 years from 28.86% to 10.27% in 2006. If this trend continues, the equity growth rate will drop below 10% next year.

The Earnings per Share growth rate has been an anemic 5% each of the last 3 years. And Sales growth rate has remained in the single digit territory over the last 4 years.

Stock Analysis:

This business has been a fairly steady performer over the years. The decreasing equity growth rate shows up in the analysts’ forecast of 7.5% EPS growth rate. The Price to Earnings ratios has remained amazingly constant throughout the 10 year period at 12.

I calculated the sticker price at $33.58 and the MOS price at $16.79. That means a premium of 106.71% over the sticker price. Prior analysis has shown that buying a dividend paying stock at 50 cents on the dollar seems to be impossible due to the dividends themselves setting a floor price for the stock.

Dividend Analysis:

MO is currently yielding a very juicy 4.96%.  That is more than double the yield of either the S & P 500 Index and the DJ 30 Index.

Looking at the dividend growth rate over the last 10 years, it has been very stable and regular at approximately 8.50%.

The dividend payout ratio has been slowly increase over the last decade - from a low of 51% to today’s high of 62%.

Looking at the historical dividend yield, it is interesting to see that this stock has always had a healthy dividend yield. The average high dividend yield is 6.72%, the average low dividend yield is a whopping 3.93%.

By these standards, today’s 4.96% does not seem like such an astronomical amount. In fact, the 10 year average dividend yield is 5.32%.

Using the average high dividend yield of 6.72% gives a sticker price of $51.22. Today’s price of $69.41 is a premium of 35.51% over our sticker price.

Conclusion:

From a yield perspective, MO definitely pays a fairly juicy return. However, even by its own standards, this stock is still priced high. And of course, being a tobacco company, it seems to be under litigation all the time. I would not consider this stock for my portfolio. I am looking for a dependable company to pay me dividends continuously. Although this company has continued to deliver dividends consistently over the last 10 years, the threat of litigation and the growing movement to non-smoking makes me think that I can find my yield elsewhere.

Here is a summary of my calculations.

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