Why Altria's Stock Decline May Present a Good Buying Opporunity

NEW YORK (TheStreet) -- Shares of Altria (MO) -- the maker of Marlboro cigarettes -- have fallen about 3.5% this week, which raises the question if the decline presents a good buying opportunity.

The stock's decline follows the company posting last week second-quarter adjusted earnings that were a penny short of analysts' estimates.

Of course, the entire market is down this week, and Altria's stock has outperformed the Standard & Poor's 500 Index so far this year. Shares of Altria are up 5.4%, compared with the S&P 500's 4.5% rise.

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Still, the recent decline in Altira's share price may present a good buying opportunity for two reasons: The company is still very profitable and it returns lots of cash to shareholders through dividends and stock buybacks.

In the second quarter, Altria's revenue fell 0.8% and its earnings fell 1.3%, but the company still posted a healthy profit margin of 31.5.%. Furthermore, it slightly narrowed its estimated range of earnings for the year, which makes the midpoint of the range a penny higher than before.

Altria pays an annual dividend of $1.92 per share, which comes to a yield of 4.7%, and the company plans to start another $1 billion stock buyback program after its current $1 billion program expires at the end of the third quarter. The new program will last through 2015.

Based on the new program, the company's buyback yield -- its shares repurchase program divided by its market capitalization -- comes to 1.2%. So the sum of Altria's dividend and buyback yields is close to 6%.

On Friday morning, shares were trading at $40.45, down 15 cents.

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At the time of publication, the author held no positions in the stock mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates ALTRIA GROUP INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALTRIA GROUP INC (MO) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins, growth in earnings per share, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 3.3%. Since the same quarter one year prior, revenues slightly increased by 1.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • The gross profit margin for ALTRIA GROUP INC is rather high; currently it is at 57.93%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 27.60% is above that of the industry average.
  • ALTRIA GROUP INC's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ALTRIA GROUP INC increased its bottom line by earning $2.26 versus $2.06 in the prior year. This year, the market expects an improvement in earnings ($2.57 versus $2.26).
  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Tobacco industry and the overall market, ALTRIA GROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.

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