Recently, DSR members brought my attention to two stocks for a variety of reasons: Booz Allen Hamilton (BAH) and Altria (MO). BAH has a very strong dividend triangle, has great potential and can easily be viewed as a long-term investment for investors. Around 50% of its revenue comes from the defense sector, which is a stable source of income.

On the flip side, MO’s recent decline has been seen by some as an opportunity. I respectfully disagree with these investors. First of all, you should never buy a stock based on valuation alone. Second, Altria has very few growth vectors. Sometimes holding the Dividend King title just isn’t enough. Basically, Altria gets stuck with highly profitable products that fewer and fewer consumers have to buy.

But let’s start with the good news!

Buying opportunity: Booz Allen Hamilton (BAH)

  • Dividend yield: 1.55%
  • Market capitalization: 11B
Source: Booz Allen Hamilton website

Booz Allen Hamilton Holding Corp is a provider of business consulting services to the US government. Other services offered include technologies such as cloud computing and cybersecurity advice, as well as technical advice. Advisory services focus on defense, intelligence and civil markets. In addition to serving the US government, Booz Allen Hamilton offers management and technology consulting for large corporations, institutions, and non-profit organizations. The company supports customers with long-term engagements around the globe.

Latest quarter

BAH had a robust quarter with a strong jump in profits. Revenue also rose to $ 1.90 billion from $ 1.85 billion in the third quarter of fiscal 2020, the consulting firm said. Booz Allen said the period saw slower-than-expected sales growth due to the impact of the COVID-19 pandemic and the change of president. The company still had total inventory up 6.1% year over year to $ 23 billion. With the improved results, Booz Allen announced a $ 0.06 quarterly dividend increase to $ 0.37 / share, payable to shareholders of record on March 2nd starting February 12th.

Investment thesis

With an army of more than 24,000 consultants, BAH is the market leader in the US government’s management and technology service contracts. BAH shows strong organic growth (double-digit for 2020) as the demand for talent in BAH’s specialist areas is growing. Since the BAH has specialized in highly specific areas, it has built a good reputation that is difficult to overcome. In other words, BAH has built its own entry barrier against smaller competitors. Most customers will stay with BAH during a recession because they value BAH’s expertise. BAH fits in very well with the DSR investment model and most of their business is recession-resistant. If you are going to keep it for a while this is a buy.

Sales page: Altria (MO)

  • Dividend yield: 7.00%
  • Market capitalization: 92B
Source: Altria website

Altria includes Philip Morris USA, US Smokeless Tobacco, John Middleton, Ste. Michelle Wine Estates, Nu Mark, and Philip Morris Capital. It has a 10.2% stake in the world’s largest brewer, Anheuser-Busch InBev. Through its tobacco subsidiaries, Altria holds the leading position in cigarettes and smokeless tobacco in the United States and number two in machine-made cigars. The company’s Marlboro brand is the leading cigarette brand in the United States with a 40% share.

Latest quarter

MO saw moderate growth (5%) but earnings decreased 3%. The cigarette volume increased by 3.1% and the cigar volume by 15.0%. The company’s smoke-free volume increased 0.5%. That doesn’t look like a strong growth vector. Altria’s Board of Directors approved a new $ 2 billion share buyback program that Altria is expected to complete by June 30, 2022. Management expects to deliver adjusted diluted EPS for the full year in 2021 in a range of $ 4.49 to $ 4.62, a growth rate of $ 3% to $ 6% from an adjusted diluted EPS base of $ 4.36 in 2020.

Investment thesis

I know I won’t find any friends here. Altria has been valued by many investors with dividend growth for decades. About two to three years ago we classified Altria as a “sale” at DSR. I didn’t like the company and couldn’t figure out how it could grow in the future. Is it time to get back in after the stock price has lost about 35% of its value from 2018 levels? No, just no!

Not that long ago, MO was trading around $ 70 and it’s now in its 40s. Many investors saw the opportunity to catch a dividend payer with a clean dividend history. However, investors are finding that the cigarette market is not healthy (duh?). In the US, the number of smokers is falling and management is looking to diversify. With 90% of sales in smokable products, MO is still not anywhere near diversification. An 8% + yield is attractive, but smoking is no longer cool and the future of MO is cloudy at best. Vaping now has its own problems too. Things don’t look good for this long-term dividend king.

A word about sector allocation

Investing more than 20% in a single sector will decrease your diversification and potentially increase the volatility in your portfolio. You can live or die by the sword. You don’t have to do that.

Check your sector allocation before selling a stock and replacing it with another. You don’t have to invest in all 11 sectors to be successful. Focus on sectors that you understand and are comfortable with (e.g. turnover / volatility, business model, impact on your business, business cycles, etc.).

The two dividend-paying companies discussed today come from two different sectors and are not necessarily interchangeable in a portfolio. Based on your own due diligence, please.

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