By Lauren Foster
Tobacco companies face an uncertain future, even as they try to move beyond combustible cigarettes to smokeless products. But one thing is certain for investors in Altria Group or British American Tobacco -- the dividend is safe.
The stocks have slumped this year and now yield nearly 10%. While the very highest yielders can be value traps and vulnerable to cuts in their payouts, analysts said income investors can bank on these dividends.
Just don't expect the beaten-down stocks to outperform the market anytime soon.
Vivien Azer, managing director and senior research analyst at TD Cowen, said Altria and BAT understand the dividend is sacrosanct. Cutting it isn't an option, she added.
Both companies are solid income plays, she said, and while the industry backdrop is challenging, the opportunity to generate strong cash flow to fund the dividend remains good.
Tobacco companies face headwinds from declining sales of traditional combustible cigarettes and competition from an influx of illicit e-cigarettes. High inflation has also pushed some smokers to trade down to cheaper brands.
Shares of Altria, the maker of Marlboro cigarettes, are down 9.6% this year to $41.32 at the close on Thursday. The dividend yield stands at 9.5%.
The company has a long history of dividend increases and lifted its quarterly dividend by 4% to 98 cents a share in August. That marked the 58(th) dividend increase in the past 54 years.
As Barron's wrote recently, few big companies are as committed to their dividends as Altria. Since 2010, Altria had targeted a roughly 80% payout ratio of earnings to dividends, among the highest in the S&P 500.
At its investor day in March, the company shifted to a mid-single-digit growth target through 2028 in what the company said was a sign of confidence. Under the old objective, potential earnings volatility could affect the dividend.
Azer said that over the past five years, Altria's dividend has grown at a 7.7% compounded annual growth rate, but that it will slow in the coming years.
"We are looking for a deceleration because we're looking for weaker earnings growth," she added. "So over the next five years -- from 2023 to 2028 -- we're looking for a 4.3% CAGR in terms of the dividend."
Goldman Sachs managing director and senior analyst Bonnie Herzog is bullish on Altria, with a Buy rating on the stock and $47 price target. She said the company can more than offset the decline in cigarette volume by raising prices.
Altria has "incredibly strong free cash flow -- enough for them to return billions of dollars to shareholders in the form of an attractive buyback program and certainly the dividend, which is quite attractive."
Investors, she said, are being paid to wait with the dividend yield, she said.
"There's an opportunity, given the attractive valuation, to buy the stock here, and while they're waiting for trends to improve, if you will, you really can bank that very attractive dividend," Herzog said.
London-listed British American Tobacco, whose portfolio includes Camel and Lucky Strike, on Wednesday said it would book a one-off impairment charge for the value of the company's cigarette brands. Its American depositary receipts plunged on the news. So far this year the ADRs are down 26.5% to $29.38. The dividend yield is 9.5%.
Altria and BAT's ADRs have underperformed the broader market, which so far this year is up 19.4%, including dividends.
Azer rates Altria stock Market Perform with a price target of $42.00. Investors should hold the stock, but not add to the position.
"The reason that we're market perform, not underperform, is because of the yield," she said.
"Where our caution comes from really is the clear structural headwinds that we see in the U.S. combustible market." she added. "That's very important for Altria, given their geographic concentration, but that also informs our more cautious view for British American Tobacco."
TD Cowen also rates BAT's ADRs Market Perform with a price target of $30.00.
Write to Lauren Foster at lauren.foster@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 08, 2023 04:00 ET (09:00 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
Comments