Altria (MO) is a major consumer staple company and one of the so-called Blue Chips. These are companies with a corporate history of at least 100 years that pay dividends yielding at least 3.0%.

For conservative income investors, these Blue Chips can be worthy of a closer look. These are companies that combine stable, relatively low-risk businesses with above-average income generation potential.

Company Overview          

Altria operates in the tobacco industry. It manufactures and sells cigarettes, smokeless tobacco products, and wine. Altria also holds a stake in Anheuser-Busch InBev, which is the world’s largest beer company. About 85% of Altria’s revenues are generated from smokeable product sales, which includes cigarettes and cigars. The company owns the world-famous cigarette brand Marlboro. Altria only sells its products in the US, international markets are serviced by Philip Morris.

Altria reported its second-quarter earnings results in July. The company earned $1.01 per share during Q2, which represents a compelling 19% increase over the prior year’s second quarter. Revenues were down by 3.7% year over year, mainly due to lower cigarette shipments.

Growth Prospects      

The tobacco industry is not a high-growth market, but Altria has nevertheless been able to generate compelling growth rates in the past. Cigarette sales volumes are declining, but since customers are not price-sensitive at all Altria can increase the price per cigarette regularly. This does not only allow for revenue increases in most years, it also leads to margin increases, which, in turn, leads to rising profits.

Altria’s Anheuser-Busch stake will generate rising dividend income for Altria, and Altria’s wine segment continues to grow as well. The most promising growth project is the roll-out of iQOS, though. iQOS, which is a heat-not-smoke product that allows for tobacco consumption with less risk to one’s health, was developed by Philip Morris. Altria plans to license the product from Philip Morris and awaits approval for the product in the US. Once the FDA has approved iQOS Altria will be able to generate revenues from the product which has been a huge success in markets such as Japan and Europe.

Valuation, Dividends, And Expected Returns

Altria’s management forecasts earnings per share of $3.94 to $4.03 for fiscal 2018. This represents an earnings per share growth rate of 16%-19% over the prior year’s level. The forecast means that shares are trading at slightly below 15 times this year’s earnings right now.

Relative to a median earnings multiple of 16.2 over the last decade shares, therefore, look slightly undervalued right here. At the moment Altria’s shares offer a dividend yield of 4.7%, which is more than twice the broad market’s dividend yield. Altria has increased its dividend at the end of August during the last couple of years, so investors can count on even higher payouts in the foreseeable future.

Due to its dividend yield of close to 5%, earnings per share growth, which we see at ~7% annually over the coming five years, and a small tailwind from multiple expansion (towards a fair valuation of 16 times earnings) Altria should be able to deliver annual total returns of 13%-14% over the coming years.

This is a promising total return outlook, and the fact that investors can achieve such returns by investing into a relatively safe Blue Chip stock makes this investment opportunity even better.

Final Thoughts

Altria is not active in a high-growth industry, but the business model of increasing revenues per cigarette and thereby growing margins works well. Altria has generated strong results in H1 and will likely increase its dividend in the next two weeks.

Based on the current total return outlook Altria looks like an attractive pick for income investors.