January 30, 2019 / 10:14 PM / 23 days ago

Altria seen as a bargain even after bounce off four-year low

(Reuters) - Altria Group Inc, one of the worst performing stocks of 2018, is gaining traction again as the cigarette company’s cheap valuation and fat dividend yield are too tempting for some bargain hunters to ignore according to analysts and investors.

Shares in the maker of Marlboro cigarettes have rebounded 12.8 percent from a more than four-year intraday low reached on Jan. 24. And in Wednesday’s session alone it rose 4 percent ahead of its first earnings report since disclosing a $12.8 billion deal for a minority stake in vaping start-up Juul.

The stock has a long way to go to recover from its 34 percent decline between early November and late January. And analysts and investors cite clear risks such as the potential for tighter regulations and the decreasing popularity of cigarettes. But still, they see plenty more gains to come.

“The risk-reward at this price point is skewed in your favor,” said Jordan Waldrep, who manages the USA Mutuals Vice Fund in Dallas. USA Mutuals holds about 159,000 Altria shares.

In comparison to Altria’s current trading multiple of 11 times earnings estimates for 2019, Waldrep sees a trading ratio of around 14 as reasonable.

Up to Jan. 24, Altria shares had a rough few months. The stock was already headed for an annual decline in 2018, then it started a deeper dive on Nov. 8 when U.S. regulators announced a ban of fruit and candy flavored electronic cigarette sales in stores.

It tumbled further after the Dec. 20 Juul investment news.

The company’s dividend yield rose to 2009 levels and was last at 6.97 percent compared with historical average of 3.49 percent, according to Refinitiv data. A spiking yield often signals fear that payouts could be at risk but analysts and investors say the dividend is safe even though Altria will have to take on debt to close the Juul deal.

“It reduces the margin for error regarding free cash flow relative to dividend but, they should still be covered,” said Waldrep. Any dividend concerns could be deferred into the future, if Altria decides to buy Juul outright, he said.

“That’s the debt that gives you pause from an investment standpoint, the idea it’s coming down the pipeline.”

GRAPHIC-Altria dividend yield vs price performance, 10-year average. - tmsnrt.rs/2TmO8bX

Cowen analyst Vivien Azer also has confidence that Altria brings in enough cash to sustain its dividend and her price target of $53 shows some hope the stock could rise further.

“Valuations are certainly attractive relative to historical levels” says Azer.

Azer is less bullish than peers as Wall Street’s median price target is $59. Azer downgraded Altria to a hold rating earlier this month and cut her price target from $74 on worries about decelerating cigarette sales.

On average Wall Street analyst expect Altria to report fourth-quarter earnings per share (EPS) of $0.95, up 4.4 percent from a year ago on revenue of $4.8 billion, up 2 percent from a year ago, according to IBES data from Refinitiv.

When it releases results before market-open on Thursday investors will likely focus on how Altria’s 2019 EPS outlook compares with its long-term growth target range of 7 percent to 9 percent, according to Azer who is less optimistic than peers.

“What keeps us cautious is we think there’s downside risk to consensus estimates for 2019 and 2020 driven by deteriorating cigarette volumes,” said Azer whose $4.20 estimate for 2019 EPS compares with consensus expectations for $4.24.

Wednesday’s $1.89 gain to $47.80, showed some optimism though the stock was still well below its 2018 high of $71.86.

Investors may have been reading a Jan. 28 report from Wells Fargo analyst Bonnie Herzog who told investors to “stop the madness” and take what might be the best opportunity to buy Altria shares since its 2008 spin off from Philip Morris. Herzog rates the shares outperform with a $65 price target.

Additional reporting by April Joyner and Chuck Mikolajczak; Editing by David Gregorio

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