Why Altria trades at a 28% discount to Philip Morris

At ~$41 per share, Altria (NYSE:MO) trades at a P/E of ~10 and offers a yield of ~8.1%. At ~$72 per share, Philip Morris (NYSE:PM) trades at ~13.9 times earnings and offers a yield of 6.5%. Why is MO cheaper than PM?

One reason is MO’s bigger debt levels, such that its S&P credit rating is “BBB”, which is much worse than PM’s “A” rating.

Another reason is that investors are worried that a MO-PM merger would lead to essentially a dividend cut for current MO shareholders. PM currently offers a 6.5% yield that’s 20% lower than MO’s current yield.

Since the merger could be a potential all-stock, merger of equals, based on Tuesday’s market close prices, the combined market cap of Altria and Philip Morris would be ~$190.3 billion.

Additionally, based on the percentage of their current market caps the combined company’s annual payout would be ~$4.14 per share with a share price of ~$59.54 for the combined company. This implies a yield of ~6.95% for the combined company.

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5 Things That Can Drive Powerful Stock Movements

Summary

  • Many forces act to drive stock price movements over the short and long term.
  • Ultimately, in the long run, the total returns from your stock portfolio are driven by the performance of the underlying businesses and the valuations you bought the stocks at.
  • So, focus on business fundamentals and make sure your chosen stocks have stable and growing profits and reasonable debt levels.

Five things that can drive powerful stock movements are news, sentiment, profits, valuation, and debt levels.

News

In the short run, the stock price can be driven by news.

M&A activities are a common example. Depending on how positive (or not) the market feels about the stocks related to the M&A activity, the stocks may fall or rise meaningfully on the day of the news announcement.

As a side note, many acquisitions, especially large ones, require integrations of complicated businesses and cultures, and more often than not lead to underperforming stock prices, at least over the next year or two after the purchase…

Other common examples are earnings release or guidance revision. Depending on the results of a company’s earnings release that may include changes in the management’s outlook for the company, the underlying stock could go up or down.

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Why TD Bank is a Top Dividend Stock to Buy Now

Low-Risk Toronto-Dominion Bank

  • Recent Price: CAD$72.20
  • Yields: 4.1%
  • Dividend Growth of +7%
  • 5-year total returns estimate: 11-12% per year
  • Discount of ~12%

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has a 1st or 2nd position in Canada and a sizeable business in the U.S. (about 38% of net income). It focuses on retail banking, which is perceived to be lower risk.

Recent Performance

TD’s recent performance has been stable. In the first 9 months of fiscal 2019, TD’s revenue climbed 6.8% to CAD$30.7 billion and adjusted earnings-per-share rose 5.6% to CAD$5.11. The U.S. Retail segment continues to be the key driver of growth. The provision for credit losses ratio was 0.43%, which aligns with the average of the Big Six banks.

TD’s capital position remains strong with its common equity tier 1 capital ratio at 12%, and its shareholders’ equity rose 11% from $78 billion a year ago to $86 billion today.

Strong Dividend Track Record

TD has reached our minimum yield target of 4.1%.

Source: TD Q3 2019 Quick Facts (pdf)

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