Tobacco stocks are killing it in 2024: Altria is a bargain

Tobacco stocks are doing well this year, even as most of them record slowing revenue growth metrics. Altria (MO) stock has jumped by over 32% while British American Tobacco (BAT) has risen by 24%.

Philip Morris has jumped by 29% while Imperial Brands is up by 21% while Vector Group has risen by almost 40%. This article explains why Altria looks like the best tobacco stock to buy this year.

Altria is a dividend king

Altria investors mostly allocate cash to the stock because of its dividend payments, which have been growing over the years. It has become a dividend king having risen its payouts for 54 years.

Altria has a dividend yield of 7.56%, meaning that investors can rely on its payments each year. As interest rates start falling, these dividend stocks will become good places for investors to pack their money. A $10,000 investment will bring in about $756 a year in dividend payouts alone.

Altria’s dividend seems safe as the company has a payout ratio of 79.67%. Not a very good ratio but not the worst either. 

Also, the dividend payouts are growing, with the company having a five-year compounded growth of 4.14%. Again, not good, but not very bad either. Just this month, the company increased its dividend by 4.1% to $1.02 per share. It has paid over $32 billion in dividends in the last four years and is also repurchasing shares, bringing its outstanding ones to 2.2 billion.

Challenges remain

Still, Altria and other tobacco companies are facing big challenges ahead. The most important one is that they are no longer growing and their pivot to alternatives is not working out too well. 

Altria, for example, was embattled in the Juul debacle. It invested $12.8 billion in Juul, a company that was once popular among young people. It had to painfully take a big write down in that investment.

The most recent results showed that Altria’s business is going in reverse as volumes drop and pricing fails to cover the rest. 

Its most recent financial results showed that revenues dropped by 4.6% to $6.2 billion. For the first half of the year, revenues dropped by 3.6% to $11.7 billion. 

Other tobacco companies had a similar performance, with British American Tobacco’s sales falling by 0.8% and Imperial Brands’ 1.3%. 

Philip Morris was the only company to record higher sales in the quarter. Its shipment volume rose by 2.8% while its net revenue jumped by 9.6% and operating income soared by 12.5%. 

Altria is not expected to return to strong revenue growth soon. Analysts expect that its revenue for the current quarter will be $4.8 billion while the annual figure will be $18.34 billion, down by 10.60% from 2020.

Still, Altria is seeing good results in its NJOY business, whose consumable shipment volume rose by 14.7% in the last quarter to 12.5 million units. Devices volume rose by 80% to 1.8 million while the retail share rose to 5.5%.

The company hopes that NJOY, which it acquired for over $2 billion, will help it to dominate the industry. 

Altria seems like a bargain as it trades at a forward P/E ratio of 8.50, down from the industry average of 19.8. Tobacco stocks always trade at bargain valuations because of their slow growth figures.

Altria stock price analysis

Fundamentally, Altria faces major headwinds as its growth slows. It is also unclear whether its non-combustible business will continue thriving in the long term.

On the weekly chart, the weekly chart, we see that the stock has jumped sharply in the past few years and is now sitting at its all-time high. 

It has soared from $21.43 in 2020 to over $52 today. Most recently, the stock has jumped in the last 9 consecutive weeks, the longest run since 2022.

The stock has recently crossed the important resistance point at $47.07, its highest point on May 9, invalidating the double-top pattern that was forming. 

It has also remained above the 50-week and 100-week moving averages, meaning that bulls are in control. The Relative Strength Index (RSI) has jumped to the extreme overbought level of near 80 while the MACD indicator has soared to a record high.

Therefore, based on trend-following strategies, I suspect that the stock will continue doing well in the long term, with the next target being at $60. 

However, the risk is that the stock could suffer a big reversal in the coming weeks as some investors start taking profits. If this happens, it will retest the support at $47, doing a break and retest pattern, and then resume the uptrend.