Altria has fundamental upside to $78/share (10.5%) but faces headwinds from higher risk-free yields compressing its relative value.

And the first stock we're going to be looking at is Altria, stock ticker mo, who just announced a 4.7% dividend increase. Now, Altria is actually a stock that I've held in my personal portfolio for just a few years now, and on a total return basis, I've performed very well.

Altra is up by close to 90%. And keep in mind, at the time that I added this stock, it was yielding roughly 9%. So, when we look at my dividend yield on cost, it's now sitting closer to 10%. It's at 9.63%.

Now, what's interesting is if we look in the last year, they're up about 8.78%. That's decent performance. In the last 5 years, only up about 46%. However, if we look at Altra on a total return basis, here's what you'll notice.

In the last 5 years, they're up 111%. Actually outperforming the S&P 500.

Now, we need to ask ourself, why was this the case? Why did Altra outperform the S&P 500? because we know that over the long-term free cash flow growth is what pushes share prices higher.

And if we look at the free cash flow growth for Altria, what you'll notice is free cash flow growth over the past decade really hasn't been too impressive. It's roughly 5% in the 5 years sitting at about 2.16%.

So again, I present the question, how has Altria managed to outperform on a total return basis? Well, the obvious answer is they have a very high starting dividend yield. High dividend payments they've not only been able to maintain but grow over time.

But that's not the only thing that's played a major role.

What we have to do is look at Altria through sources of returns. Now, this is an incredibly important concept to understand. And in fact, over on dividendology.com the other day, I took a deep dive into this concept.

So, be sure to check out that article because it explains exactly how different stocks outperform over time and how you can capitalize this by looking at them through the lens of sources of returns.

But here's what we need to understand in regards to Altra. Over time, a stock's potential returns come from three places. Earnings per share growth, dividends paid to shareholders, and changes in the valuation multiple.

As investors, we can project what future earnings will look like, what future dividends will look like. But in the short term, it's nearly impossible to project changes in the valuation multiple.

However, the caveat to this is that's what creates opportunities.

So, we can see here in the blue their change in earnings per share. In the green, we can see their change in dividends per share. But in the red is the change in their valuation multiple.

What you'll notice is earnings and dividends continue to climb in 2020 2122. But the valuation multiple declined significantly. This area right here is what created such a massive opportunity.

And ironically enough that's the point in time when Altra's starting dividend yield reached its highest levels. For example, you can see there was a period of time not too long ago when the yield was close to 9.5 9.6%.

And for a long time, the yield was well above 8 or even 7%. So when you can buy a stock that's seen a major pullback in the valuation multiple, but they continue to grow earnings and dividends at a high rate, oftent times that creates an opportunity.

Now, that being said, let's take a moment to talk about what does the current sustainability of the dividend look like right now. Because when we look at the dividend breakdown sheet, you'll notice the free cash payout ratio is indeed large. It's sitting at 76.7%.

But you really need to understand the capital allocation priorities of the business. What do I mean by this? Well, here's where a lot of people get confused. If we jump over to our stock screener tab, let's go ahead and plug in Altria.

What a lot of people end up doing is determining how they feel about a company's dividend payouts by how high their return on invested capital is. And this is basically telling us how profitable are the projects the company is reinvesting its capital back into.

Remember, remember management teams have five ways to allocate capital. They can reinvest back into the business. They can pay down debt, buy back shares, attempt mergers and acquisitions, or pay out dividends.

Now, with Altria, we can see return on invested capital in 2025 was around 34.3%. That's absolutely exceptional. Typically, as a baseline, you want to see about 10%, highquality companies get around 20%.

So, why is Altria choosing to pay out the vast majority of its cash flows and dividends when return on invested capital is so high? Well, one of the things we have to understand, and again, a lot of people miss this, this is a backwardslooking metric.

The reason Altra generates such high returns on the capital it reinvests back into the business is because they reinvest such little capital. It's a lot easier to get a high ROIC if you reinvest small amounts of capital.

And management understands there's not a lot of reinvestment opportunities for this business. And so what they've stated in the past is that their main capital allocation priority is paying out dividends.

In fact, they even target an 80% free cash flow payout ratio. So this is by no means a mistake. The high payout ratio is exactly what management is targeting.

And so the irony of all this is yes, they're experiencing volume declines. Revenue has been stagnating. You can see revenue per share stagnating. But take a close look at what's actually going on with their margins.

Again, while revenue has essentially declined over the last 4 to 5 years, gross margins have expanded considerably, going from 58.9 all the way up to 72.2, 2, which again is ultimately leading to free cash flow growth, causing the dividend payouts to continue to grow and be sustainable over time.

And so I guess the last thing we really need to address, Altra has done very well over the last few years. They've managed to maintain those high dividend payouts and have a runway to continue to grow them.

And the recent dividend increase is still very nice.

So is Altra still interesting at all at current prices? Well, remember how we talked about looking at Altra and stocks through the lens of sources of returns? Well, we do need to understand that Altria is trading at one of its higher valuation multiples over the last 5 years.

We can see currently sitting at about a 12p multiple when the forward-looking average is about 9.96.

However, there is a caveat to that. Jump over to the stock valuation sheet and look at Altria. Look at them through the lens of a dividend discount model. Here's what's so interesting.

Altria, based on how they're growing free cash flow, based on how earnings are projected to grow moving forward, perhaps they can grow dividends at a rate of 3% moving forward.

That would imply a fair value of about $78 per share, which means they still have roughly 10.5% upside from current prices. Fundamentally speaking, I think Altria actually still has more upside here.

But here's what we also need to understand. The macro environment we're operating in continues to change as treasury yields go dramatically higher. They've gone way higher over the last year.

For example, look at the 3-year. It was sitting at about 3.5% a year ago, now sitting at 4.7. The 10-year, you can get a risk-free 4.95%. Just earlier today, this was roughly 5%.

And on the 20 and 30-year, you're looking at about 5.3% yields. So, really understand Altria is being looked at through the lens of opportunity cost. Their starting yield is now substantially lower in the 6% range, while risk-free yields are sitting in the low 5% range.

So, this opportunity cost perspective is undoubtedly going to pull back a little bit overall on the share price.