Key Points
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Altria Group’s earnings were solid, driven by price increases and a smaller-than-expected volume decline.
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Management keeps repurchasing stock and raising the dividend.
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The stock looks a bit more expensive today.
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Shares of Altria Group (NYSE: MO) jumped 15.9% last month, according to data from S&P Global Market Intelligence. The tobacco giant is not the most exciting stock, but it keeps delivering steady earnings for shareholders and is being prized as a safe haven amid market volatility. The company reported strong earnings last quarter, and investors were pleased with the results.
Here’s why the stock was up in October, and whether shares are a buy right now.
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Strong growth through price increases
Altria sells tobacco and nicotine products, primarily in the United States market. Last quarter, it delivered solid results despite the decline in cigarette usage in the country.
Its volumes for premium Marlboro cigarettes declined by 6.4% year-over-year, but growth in its discount category led to overall cigarette volume declines of 2.9%. Through price increases, Altria is able to offset these volume declines, with the smokeables business segment reporting 3.7% revenue growth net of excise taxes, and similar levels of earnings growth.
Its oral tobacco category had flat revenues, but its on! nicotine pouch brand saw 13.3% growth in the period, which investors were likely happy about as well. Management keeps repurchasing stock to lower shares outstanding, while the dividend was raised in August, marking 57 straight years of consecutive dividend hikes.
Is Altria Group stock still a buy?
With Altria’s share price zooming to new highs, it now trades at a price-to-earnings ratio (P/E) of 16. This is one of its highest levels in years, and indicates that investors want safer stocks, with volatility appearing in the artificial intelligence (AI) trade.
Altria should be able to keep up its steady earnings growth in the years ahead. It can raise prices to offset volume declines, while moving into new categories like nicotine pouches and electronic vapor that are experiencing user growth in the United States and around the globe. Through share repurchases, it can keep increasing earnings per share (EPS), which will fuel even more dividend hikes that can be paid to shareholders.
However, right now, a P/E ratio of 16 does not look overly appealing for a slow-growth stock. The dividend is currently yielding just under 6%, which is pretty good for an income stock, but don’t expect much more in returns (dividends plus dividend growth) in the coming years because of volume declines, an inherent headwind for the business.
Should you buy stock in Altria Group right now?
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
