- Wednesday, October 16, 2024
The stocks have experienced a significant slump this year, resulting in a yield of nearly 10%. While some high-yield stocks may be risky and vulnerable to payout cuts, analysts assure income investors that these dividends can be relied upon.
However, it's important to note that these beaten-down stocks are not expected to outperform the market in the near future.
Vivien Azer, managing director and senior research analyst at TD Cowen, emphasized that both Altria and BAT prioritize the protection of their dividends. Cutting the dividend is simply not an option for them.
According to Azer, both companies are solid choices for income investors. Despite the challenging industry landscape, they still have the potential to generate strong cash flow to sustain their dividends.
Tobacco companies are currently facing several challenges. These include declining sales of traditional cigarettes, competition from illicit e-cigarettes, and the impact of high inflation leading some smokers to switch to cheaper brands.
As of Thursday's closing, shares of Altria, known for its Marlboro cigarettes, have fallen by 9.6% this year and are currently priced at $41.32. The dividend yield currently stands at an attractive 9.5%.
Altria has a long-standing record of increasing its dividends. In August, the company raised its quarterly dividend by 4% to $0.98 per share. This marked the 58th dividend increase in the past 54 years.
Recently, it was noted that few companies are as dedicated to their dividends as Altria. Since 2010, the company has aimed for a payout ratio of roughly 80% of earnings to dividends, ranking among the highest in the S&P 500.
During its investor day in March, Altria shifted its growth target to a mid-single-digit figure through 2028. This move was seen as a sign of confidence since it reduced the potential impact of earnings volatility on the dividend.
Azer mentioned that the growth rate of Altria's dividend over the past five years has been 7.7% compounded annually. However, she anticipates a slower growth rate in the coming years due to weaker earnings. The projected compound annual growth rate (CAGR) for the dividend from 2023 to 2028 is expected to be around 4.3%.
Altria's Strong Cash Flow and Attractive Dividend Yield Make It a Buy, Says Goldman Sachs Analyst
Goldman Sachs managing director and senior analyst Bonnie Herzog is bullish on Altria, giving the stock a Buy rating and setting a price target of $47. Despite the decline in cigarette volume, Herzog believes that Altria can offset this through raising prices.
Altria boasts incredibly strong free cash flow, which allows the company to return billions of dollars to shareholders through a buyback program and an attractive dividend. According to Herzog, investors are being paid to wait with the dividend yield.
The current attractive valuation presents an opportunity to buy Altria stock. While waiting for trends to improve, investors can bank on the appealing dividend.
In contrast, London-listed British American Tobacco (BAT) announced that it would book a one-off impairment charge for the value of its cigarette brands. This news caused BAT's American depositary receipts (ADRs) to plummet. So far this year, BAT's ADRs have declined by 26.5% to $29.38, resulting in a dividend yield of 9.5%.
Both Altria and BAT's ADRs have underperformed the broader market, which has seen a 19.4% increase so far this year, including dividends.
Azer rates Altria stock as Market Perform with a price target of $42.00. While investors should hold the stock, adding to the position is not recommended.
The reason for the Market Perform rating, rather than Underperform, is primarily due to the attractive yield. However, there are clear structural headwinds in the U.S. combustible market that raise caution for Altria and inform a more conservative view for British American Tobacco, given its geographic concentration.
TD Cowen also rates BAT's ADRs as Market Perform with a price target of $30.00.
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