Ultria Group (MMO) Highest-Yielding Dividend Stocks Heading Into 2025!

$Altria(MO)$ is currently trading at $57.38 per share. This stock is favored by dividend investors due to its significant 7.12% dividend yield. Earlier this year, it was considered a buy at $40, meaning it has gained about 37% year-to-date.

Altria is facing a period of stagnation in terms of price movement, with its stock being highly influenced by external factors like government regulations and market shifts. While the company's dividend yield remains strong, its stock's technical setup suggests a more cautious approach, with limited growth in the short term. Watch for potential signs of a trend reversal or breakout, especially if the company continues to make progress in its shift to non-combustible products and adapts to market challenges.

Earning Overview

Altria's Q3 2024 earnings showed a 7.8% increase in adjusted diluted EPS, indicating resilience despite industry pressures. The smokeable products segment had adjusted operating income growth of 7.1% in Q3, even with an 8.6% decline in domestic cigarette volumes. Net price realization offset volume drops, contributing to a strong adjusted OCI margin of 63.1%. Additionally, the oral tobacco segment saw a 2% growth in adjusted OCI. Altria also increased its dividend by 4.1% in August, maintaining its high yield appeal to investors

Fundamental Analysis

Altria's stock performance this year has largely benefited from its expansion into non-cigarette products, notably through its acquisition of NJOY. This strategic shift is crucial as smoking rates in the U.S. have consistently declined. According to the Centers for Disease Control and Prevention (CDC), the percentage of American adults who smoke dropped to around 11.5% in 2021, a significant decrease from 20% in 2005.

As the largest cigarette producer in the U.S., Altria has been impacted by this decline in smoking, but it has managed to offset some of the lost sales by increasing cigarette prices. While rising prices per pack have helped maintain stable financial performance, this is not a sustainable long-term solution. The decline in smoking rates presents an ongoing challenge for the company, but its diversification into alternatives like vapor products may help mitigate some of the effects of this trend.

Despite these hurdles, Altria's financial stability has been relatively preserved, though its future growth will depend on how well it can adapt to the changing market dynamics.

• Revenue has remained consistent between $23-24 billion since 2009.

• Net income has grown, reaching $10.29 billion, near all-time highs.

• Free Cash Flow is robust at $8.5 billion, supporting dividend payouts.

Dividend Overview

• Yield: 7.12% (paying $4.08 per share annually)

• Dividend Payout Ratio: 67% of net income; 80% of free cash flow

• To receive the next dividend, purchase before December 16th.

Guidance

Altria's guidance for Q3 2024 and the full year remains consistent with their expectations. The company reaffirmed its 2024 full-year adjusted diluted EPS guidance in the range of $5.07 to $5.15, representing a growth rate of 2.5% to 4% compared to 2023’s base of $4.95. This growth reflects their continued strategy of balancing profitability in smokeable products while investing in their smoke-free segment, particularly the NJOY e-vapor brand and oral tobacco products like on!

Cost Savings: Altria is implementing an "optimize and accelerate" initiative aimed at saving $600 million over the next five years through process optimization and leveraging technology.

Smokeable Products Decline: Cigarette volume declines are expected to continue, influenced by economic pressures on consumers and competition from illicit disposable e-vapor products.

Investments in Smoke-Free: Continued growth is anticipated in Altria's smoke-free portfolio, which includes NJOY and oral nicotine products​

Free Cash Flow

Altria's Free Cash Flow (FCF) has been a key metric for assessing its financial health, particularly given its large dividend payouts. For Q3 2024, Altria generated $2.4 billion in free cash flow, which is part of their continued strategy of maintaining strong liquidity for dividends and share repurchases. This strong cash flow allows the company to maintain its high dividend yield while also reducing debt and funding acquisitions like NJOY​

In the first nine months of 2024, Altria's free cash flow totaled $6.1 billion, reflecting a solid capacity to fund its operations and shareholder returns. The company's management has emphasized that free cash flow will continue to be a crucial focus for sustaining dividends, particularly in light of ongoing transitions away from combustible products​.

Technical Analysis

Price Action: Altria's stock has shown a relatively sideways movement, with recent fluctuations between $43 and $47 per share. Despite the company’s strong dividend yield, its stock price has struggled to generate substantial growth, largely due to the mature nature of its core business, concerns over the shifting regulatory landscape, and the ongoing transition to non-combustible nicotine products. The price action has largely been range-bound, indicating some level of investor uncertainty.

Support and Resistance: Technically, Altria has solid support around the $43 level and resistance near the $47–$48 range. A breakout above $48 could signal further upside potential, while a breakdown below $43 could indicate a move towards $40 or lower.

Risks and Challenges

Altria, known for its Marlboro brand, holds a 44% market share in U.S. cigarettes. The company is making efforts to diversify into non-combustible products like vapes and other reduced-risk options. However, some recent moves raise concerns:

Joule Investment (2018/2019): Altria invested $13 billion in Juul, which faced severe U.S. regulatory action, driving Juul's valuation close to zero.

NJOY Acquisition (2023): Altria purchased NJOY for $2.7 billion despite NJOY having only a 3.7% market share. Initial estimates suggest they may have overpaid (valuing NJOY at up to 200x 2021 revenues).

Declining Cigarette Sales: Traditional cigarette sales are gradually declining.

Concentration in the U.S. Market: Altria’s domestic focus makes it more vulnerable to U.S. regulations compared to British American Tobacco (BTI), which has more international exposure.

Comparison with Competitors

Against peers like British American Tobacco (BTI) and Philip Morris (PM):

• Valuation: BTI and Imperial Brands are cheaper than Altria.

• Dividends: Similar yields, but Altria shows more consistent growth than Imperial Brands and offers a higher yield than Philip Morris.

Valuation

Altria's P/E ratio as of Q3 2024 is relatively low compared to the market average, reflecting the company’s stable but slow growth. The P/E ratio for MO is typically in the range of 8-10x earnings, which is on the lower end compared to its peers in the consumer goods and tobacco sectors.

As of Q3 2024, MO’s P/B ratio is close to 5, suggesting that the market values its assets (like its brands and intellectual property) at a premium.

Discounted Cash Flow (DCF):

Using a DCF model, analysts have estimated the intrinsic value of Altria’s stock to be somewhat above its current market price, suggesting that the stock is undervalued at current levels. However, this is contingent on the assumption that the company continues to generate stable cash flows, which could be impacted by shifts in consumer behavior and regulatory challenges

• Discounted Free Cash Flow (DCF): $98 per share (undervalued)

• Dividend Discount Model (DDM): $84 per share (undervalued)

• Ben Graham Formula: $64 per share (buy)

• Comparable Company Analysis:Compared to Philip Morris (PM) and British American Tobacco (BTI)Estimated fair value: $65-$75 per share

Market sentiment

Market sentiment for Altria Group (MO) has been generally positive, with the stock showing a strong performance in recent months. The company has seen notable gains, with its stock price up about 5.58% over the past 30 days and rising by over 22% over the last six months.

This uptick comes despite some volatility and fluctuations in its trading, which suggests a degree of investor confidence, especially considering the broader context of consumer defensive sectors, where Altria operates.

However, sentiment may also be influenced by broader market concerns and the company's ongoing challenges. Although Altria exceeded earnings expectations for Q3 2024, its earnings outlook has seen some negative revisions, which has led to a more cautious near-term sentiment. Some analysts have downgraded their expectations for the stock, and it holds.

Conclusion

Altria's strengths lie in its dividends, financial health, and strategic shift toward next-generation products. However, the shrinking cigarette market and regulatory risks remain significant challenges. Investors must weigh these factors carefully.

All valuation models suggest Ultra is a buy, supported by its attractive 7.12% dividend yield. If you're interested in dividends, purchasing before December 16th secures the next payout.

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