Things look to be sparking up for one of the world’s largest tobacco companies, Altria (NYSE:MO).
On Thursday, the company best known for its popular Marlboro brand cigarettes, reported solid third-quarter results. The upbeat report caused the stock to spike, pushing shares close to their recent all-time high of $28.14.
Despite the climb, the stock still looks to be an attractive investment opportunity with plenty of upside potential. And as one of the highest dividend paying stocks on the S&P 500 – with an attractive 6% yield – Altria could help stoke your investment portfolio.
Helping buoy the company is its stronghold in the so-called sin industry. Not only does Altria sell Marlboro – which accounts for 42% of all cigarette sales in the U.S –, but it’s also the parent company to five tobacco divisions, selling brands like Virginia Slims, Parliament and Basic.
Additionally, Altria owns a wine business and holds nearly a 30% stake in one of the world’s largest beer brewers, SABMiller.
But what’s really keeping the company ablaze is its focus in the increasingly popular smokeless tobacco business. Altria makes the flagship Copenhagen, Skoal, Red Seal, Husky, and Black & Mild brands.
In place of increasingly stigmatized cigarettes, rising sales of smokeless tobacco products are boosting the company’s technical outlook.
As the chart below shows, the stock has been on a major uptrend for the past two years, nearly doubling from a low near $15.90 to its current level, around $28.
In May, the stock stalled after encountering resistance around $27. By early August, shares tumbled to a low of $22.84, but quickly recovered, forming an accelerated uptrend line.
In September, $27 resistance was once again unsuccessfully tested. However, generally the more times resistance is tested, the more likely it is to be broken.
During the second trading week of October, shares bullishly broke past resistance, peaking at an all-time high of $28.14. Altria bullishly broke a small ascending triangle in the process. The triangle was formed by the accelerated uptrend line and $27 resistance.
Ever since then, the stock has been hovering above resistance. If Altria can re-test and break $28.14, no historical resistance would be in sight and the stock could soar much higher.
According to the measuring principle for the triangle, which is calculated by adding the height of the triangle ($27-24=$3) to the breakout level ($27), shares could easily reach a target price above $30 ($27+$3). At current levels, there is potential for 8.5% gains.
Fundamentally, Altria shows reasonable growth potential. Despite declining cigarette sales, expanding margins and increasing smokeless tobacco sales caused third-quarter profit to climb 3.7%.
Overall company revenue, however, fell 3% from the year-ago quarter to $4.33 billion, due to lower cigarette sales.
For the full year, the company announced a$1 billion share buyback program and said it will cut an additional $400 million in costs. As such, Altria reaffirmed that it expects earnings per share to increase 6%-9%.
In addition to moderate growth potential, the company is fairly valued with a forward price-to-earnings ratio of approximately 12.6. A P/E ratio of 15 or less can suggest good value.
The company also has an incredible return on equity (the amount of Altria’s net income returned as a percentage of shareholder equity) of around 74%.
Best of all, Altria boasts an exceptionally high forward annual dividend yield of about 6.1%. This level is likely to rise over time since the company has raised its distributions 45 times in the past 42 years.
Given that Altria is technically strong and has solid fundamentals, this dividend champion may be a welcome addition to any investment portfolio.
At the time of writing, Deborah O’Malley did not own any of the stocks mentioned in this article.