We previously published four reports analyzing and evaluating Altria Group (MO) in June. Two of those reports were 100% focused on Altria Group’s operations and the other two were analyzing Altria in comparison to its peers. Although we are not going to expect a repeat of the exceptional outperformance of Altria Group and its former subsidiary Philip Morris International relative to the S&P 500, we believe that the companies will outperform the S&P 500 over the long-term time horizon as these companies generate high levels of free cash flow and require minimal capital investment expenditures.
Part of the reason why we expect these companies to continue generating high levels of free cash flows, dividends and share repurchases is because the “Master Settlement Agreement” the tobacco companies signed with the states has effectively turned the American tobacco industry into a cartel and enabled it to continuing growing its revenues, net income and EPS. With that in mind, we believe that Altria will continue to be the best in breed tobacco maker and it offers a 5.5% annual yield and 8.7% dividend growth.
Altria has shown solid dividend growth since 2008 even though it spun-off Philip Morris International (PM) and Kraft Foods/Mondelēz (MDLZ) and those companies had higher growth potential that Philip Morris USA (Altria’s primary subsidiary). Altria’s target dividend payout ratio is approximately 80% of adjusted earnings per share. Considering that Altria Group generated a return on beginning period shareholders’ equity well in excess of 100% and a pre-tax return on invested capital of over 31%, we can see that PM can certainly afford to pay 80% of its annual profits to shareholders and leave plenty of available cash for marketing, research and development, growth CapEx, acquisitions, debt service and share repurchases.