Is Altria Stock a Buy Now!? | Altria (MO) Stock Analysis!

Altria stock (MO) has shown solid overall returns in the past year, aligning with the S&P 500, primarily due to its high dividend yield. However, it's experienced a slight pullback in the last six months after reaching a 52-week high of $68 per share. The video addresses the reasons for this dip, the safety of the dividend, and investment opportunities. The speaker, a long-term Altria shareholder with significant returns, bought into the stock when it was in the $40 range.

The recent dip is attributed to Altria's latest earnings report, where earnings met analyst expectations, but revenue fell short by approximately $55.6 million. This led to seven bearish EPS revisions in the last 90 days. Despite this, the CEO highlighted a 3.6% growth in adjusted diluted EPS, a key driver of long-term value. The decline in revenue is largely due to the long-term downward trend in cigarette smoking since 1965. While oral tobacco has seen some growth, other segments are either growing slowly or declining. However, earnings and free cash flow have continued to grow, driven by Altria's immense pricing power, which has increased its gross profit ratio significantly over the last decade, from 56.62% in 2014 to 70.27% in 2024, compensating for stagnant revenue growth.

Altria's free cash flow margins have improved, with 42-44% of every dollar in revenue becoming free cash flow in recent years, up from 25% previously. In 2024, free cash flow was $8.6 billion, while dividends paid out totaled $6.8 billion, indicating a sustainable dividend. The free cash flow payout ratio currently sits at approximately 79.5%, in line with management's target of 80%. This capital allocation strategy prioritizes dividends, making Altria a dividend king with over 50 years of dividend growth and a 5-year dividend growth rate of 4.12%.

Altria has demonstrated an exceptional return on invested capital, consistently above 30% for the last three years. This high return, coupled with an 80% dividend payout, suggests limited reinvestment opportunities within the core business, leading the company to pursue mergers and acquisitions for top-line growth. The company also engages in share buybacks, which further support per-share dividend growth, even if free cash flow remains stagnant. Recently, Altria increased its quarterly dividend by 3.9% (their 60th increase in 56 years) and expanded its share purchase program from $1 billion to $2 billion. The company maintains a healthy debt-to-EBITDA ratio of 2.0x, indicating responsible financial management. The video also notes that recent government action against illicit disposable vapes is a bullish development for Altria, leveling the playing field in the nicotine market.

Analysts project a 14% upside for Altria, with a price target of $65.60. Using a discounted cash flow (DCF) analysis with a conservative 2% free cash flow growth rate, the intrinsic value per share is estimated at $67.20, offering 16-17% upside. A dividend discount model, assuming a 2-2.5% dividend growth rate (aligned with free cash flow growth and payout ratio), yields a price target of $65.28, implying 13.5% upside. Averaging these valuations, the fair value is $66.24. Even with a 10% margin of safety, the stock remains in an acceptable buy range at $59.61. Altria's current free cash flow yield is a high 11.95%, significantly higher than companies like Coca-Cola (1.84%), Visa (3.21%), and Microsoft (2.19%). This high yield indicates Altria's strong capacity to return capital to shareholders through dividends and buybacks. Despite low growth projections, a modest 2% free cash flow growth still presents an attractive upside for the stock.