2 Reasons to Buy Altria Stock Like There's No Tomorrow

Many investors will find that Altria is the perfect stock for their portfolio right now given market conditions.

Altria Group (MO -0.89%) is an incredible stock. Since 1990, shares have delivered a total return of 124,000%. The S&P 500, for comparison, delivered a total return of just 2,900% over that time period.

There’s just one problem: Altria stock has lagged the market by nearly 25% this year. That’s a problem for previous investors, but not for those looking to get into the stock today. Due to this underperformance, shares have become a steal in a market where few bargains can be found.

The are two compelling reasons in particular that Altria stock is a buy right now.

1. Altria stock is a rare bargain

With stock markets near all-time highs, few bargains remain. The S&P 500, for instance, trades at nearly 28 times earnings. In past market cycles, that would have been the valuation level for growth stocks. Now, it’s simply the market average.

Altria, for comparison, trades at just 9.1 times earnings. But that’s not necessarily the best metric to judge the stock. As a mature, established tobacco company, Altria’s main advantage is that it generates a lot of cash. Over the last decade, free-cash-flow levels have more than doubled to around $9 billion annually. The share price, however, has remained roughly flat. In combination, this has caused the company’s free-cash-flow yield to rise.

Right now, Altria stock trades at a free-cash-flow yield of 11.6%. That’s in extreme value territory. If free-cash-flow levels remained stable, you could earn double-digit returns simply by the company passing this cash flow onto you. And Altria does a good job of this. The dividend yield, for instance, is currently around 9%.

Despite the perennial headwinds of increased regulations on tobacco products, Altria has proven able to financially navigate the situation through higher pricing and new products. It has also consistently rewarded shareholders with juicy dividends, providing decent returns despite the market refusing to value shares accordingly. The stock has lagged the market considerably over the last 12 months, but this has created a buying opportunity that is difficult to turn down.

MO Free Cash Flow Yield Chart

MO Free Cash Flow Yield data by YCharts

2. Worried about the market? This is the stock for you.

It is nearly impossible to predict short-term swings in the market, but that doesn’t mean you shouldn’t prepare. Many investors have nest eggs that they can’t afford to lose during retirement. Others have plenty to invest but can’t seem to find enough investable opportunities. Altria provides an attractive solution for nearly any investor worried about an impending bear market, or even just those who believe the market is a little overpriced.

Let’s take a closer look at how Altria has performed over previous bear markets. From 2007 to 2009, the S&P 500 delivered a total return of negative 33%. Altria stock, meanwhile, lost only 5% of its value — not a shabby performance during one of the worst bear markets on record. The flash crash of 2020 was a bit different. While Altria stock tracked the S&P 500 during the early months of 2020, shares failed to recover even as the market headed sharply higher. At the time, tech stocks were largely responsible for the market’s resurgence. Defensive stocks like Altria were largely left behind.

In many ways, Altria stock remains out of favor. The stock has delivered a total return of 25% since the start of 2020. Compare that to the S&P 500’s return of around 70%.

But this underperformance should now be viewed as a strength. Shares are cheap — very cheap. And ample free-cash-flow levels ensure a stable 9% dividend. If the market heads lower, Altria stock should healthily outperform the S&P 500. The company’s products are largely recession resistant, and it’s difficult to imagine the valuation compressing much further from here. Altria stock is simply too good a bargain to pass up — doubly so if you’re worried about where the market is headed next.

Ryan Vanzo 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.

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