Altria Stock: Take Advantage of Ex-Dividend Drop (NYSE:MO)

mario tama

For Income Investors, Tobacco Company other ,NYSE:NYSE: MO) is back at attractive valuations. As the stock has recently fallen from $45 to $42, the shares have now swung closer to a 9% dividend yield. Here’s what you need to know.

Over that Altria’s stock has fallen heavily in the last week. Volatile market conditions are a major factor to be sure. But some of the downside is also tied to the timing of the dividend. While Altria will pay its quarterly dividend on October 11, it went ex-dividend on Wednesday, 14 September. Historically, Altria shares have tended to to fall Shortly after the stock went ex-dividend, probably related to the dividend capture strategy.

How are things looking this time? Altria’s dividend is now 94 cents per quarter, up from 90 cents with the most recent announcement.

Looking at Tuesday’s close of $42.97, shares can logically be expected to trade at $42.03 on Wednesday due to a reduction in the amount of the upcoming 94-percent dividend. Instead, the shares have continued to decline and are now in the $41s:

MO Quotes

MO Quotes (Looking for Alpha)

As the graphic above shows, the stock is down another 44 cents on Wednesday morning, in addition to the 94 cents that would have fallen due to the dividend being taken out of the stock’s price. Many financial sites automatically adjust the closing price on the ex-dividend date to account for the payment.

Let’s put it in graphical form:

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MO Data by YCharts

Altria recently dropped from $45 to $43 due to a recent market drop related to high inflation. As of Wednesday morning, the account for the dividend payment would have been expected to drop to about $42. And it continues to fall beyond that level, perhaps related to short-term traders now that the stock has gone ex-dividend.

In any case, the shares are now about 10% cheaper than they were on September 9. This is why dividends should be interesting to investors.

Altria’s dividend growth continues

In August, Altria raised its dividend from 90 cents to 94 cents a quarter. This dividend increase marks 53 years in a row of such annual dividend increases for the company. This is quite a track record for a firm in an industry that is believed to have been obsolete since the 1990s.

You can find lots of other comments about Altria looking for alpha and elsewhere. I find the products they sell to be somewhat distasteful and prefer not to dwell on the subject too much. So, we will stick to purely financials.

Unit sales at Altria’s core smokeable business continue to decline. No surprise there. However, contrary to the negative narrative you’ll sometimes see, Altria has actually remained a growth venture thanks to price increases and sales from non-cigarette sources:

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MO Revenue (TTM) Data by YCharts

Say what you will about the tobacco industry, but this graph is not a sign of a dying business.

balance sheet ok

However, what about the company’s excessive debt load? With $24 billion or more in debt, isn’t Altria drowning in liabilities? You certainly hear a lot of people talking about debt as a major problem, especially when combined with the long-term decline in tobacco use rates.

But, when you look at debt in the broader context of the income statement, it’s not a showstopping issue.

While the company has a lot of debt, of course, it generates $12 billion annually in operating income. In comparison, it pays interest expenses of just $1.2 billion, or just 10% of operating income. Interest rates could double from here, and Altria’s interest expense would reach just $2.4 billion against annual operating income of $12 billion. The interest expense is not excessive in proportion to the size of the business.

Also, I’ll note that operating income has ranged from $9 billion to $12 billion annually over the years. In a short period of time, the company’s net income has increased by more than twice its total annual interest expense. Debt is a non-factor in analyzing Altria’s stock or its ability to pay and grow dividends.

What Makes Dividends Safer? With revenue and net income rising, Altria has room to increase its dividend for a long time to come. But there’s more to the company’s financial strength than price hikes on its core product line.

That other big element is share buybacks. Over the past decade, Altria has bought back 200 million shares of its company, reducing the number of shares from 2.0 billion to 1.8 billion. I’ll also note that buybacks have accelerated over the past year to take advantage of the currently depressed share price:

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YCharts. Average Diluted Shares Outstanding (Quarterly) Data by MO

With the dividend now $3.76 per share annually, the company is saving $752 million annually in dividends that it doesn’t have to pay on those retired 200 million shares.

It’s another thing that the “debt is bad” crowd is missing with Altria. It pays shareholders 8% on its dividend. Meanwhile, it is paying an average of about 2.5% on its interest to banks and bondholders. It’s clearly far more cash flow positive to repurchase shares than to pay off debt. Especially in an inflationary environment, just let that debt shrink and shrink in real terms as inflation destroys principal.

There are a lot of bad things to say about Altria’s corporate decisions, particularly around Juul and its investments in the cannabis industry. And the primary products it sells aren’t particularly promising long-term prospects.

But actual financial results remain surprisingly strong, especially for a firm that trades at less than 10x earnings. Out of all the stocks that yield more than 8%+, MO is definitely one of the safest and least risky bets in the form of a pure high income game.

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MO Dividend Yield Data by YCharts

I suspect the share price will increase significantly in the intermediate term. This is not a stock that should be bought with high expectation of capital gains. It is a bond for all intents and purposes. But if a coupon of more than 8% with a small annual increase suits your needs as a fixed income option, then MO stock is a strong choice.

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