A reason why Altria (MO) shareholders have historically achieved such strong outperformance in the market is because tobacco stocks traditionally traded at a low P/E ratio, had a high dividend yield, and a high earnings per share growth rate. From 1987 through 2007, Altria traded at an average valuation of 13.8x earnings, had an average dividend yield over 5.2%, and achieved annual earnings per share growth of 9.2%. The investors that reinvested their dividends along the way reaped 18.3% annual returns because they benefited tremendously from the reinvestment of dividends at a low valuation.
Those attractive valuations are no longer present for Altria. In fact, the excessive jubilation surrounding Altria stock in recent years has become so detached from reality that Altria now trades at its highest valuation in the past forty years. Over the past twelve months, Altria has earned $2.78 per share. This puts the current valuation at … Read the rest of this article!