1 Sky High Dividend Stock To Buy

Altria is famously one of the largest tobacco producers in the world, a fact that keeps many money managers away from it, highlighted by the 17% share price decline over the past five years.

But alongside that struggling price has been an ever more compelling reason to buy the stock for its dividend yield, which now is perched at 9.76%.

It’s clearly a very attractive yield that more than doubles the short-term treasury offering but is it safe and sustainable, or simply a value trap?

The Bull Case for Altria

The top brass at Altria are not spinning their wheels at the top of the cigarette manufacturer unaware of the forces attacking their business from all sides, whether regulatory, competitive or just a general trend toward better health. Instead, they have been diversifying the firm’s product portfolio to include vaping and oral nicotine products as well as cannabis via a stake in Cronos Group.

The theme of broadening the firm’s focus beyond its flagship product has extended to include investments in the development and marketing of reduced-risk products, such as IQOS, a heat-not-burn tobacco product. These lower risk products are emblematic of a broader shift in the tobacco industry to address changing consumer preferences, and also offer a potential growth lever.

As a dominant market share leader, Altria also enjoys strong pricing power in its core tobacco business, even though cigarette volumes have been on the decline. As a result, the company has been able to drive higher revenues through strategic pricing initiatives that in turn lead to such high profits. Last quarter alone, Altria reported $2.9 billion in operating income.

It’s that high profitability that permits the Board to continue a string of increasing dividend payments that stand head and shoulders above the payout of the average stock in the broader based market. Currently, the quarterly payout is $3.92 per share and it’s been growing in each of the last 13 years. One caveat for the longer term is the payout ratio is 76.8% which is fine now but could become problematic later.

Why Is Altria Dividend So High?

Altria’s dividend is so high because the company is highly profitable and has a high dividend payout ratio. It’s also transitioned from being a growth stock long ago to a value stock now that produces enormous cash flows of $8.4 billion in the last twelve months alone.

There is little sign that the high dividend will be chopped anytime soon given Altria’s stable revenues and profits in addition to its strong distribution network that provides a competitive edge. It enjoys an abundance of well-established relationships with retailers as well as a widespread distribution infrastructure so products are available across the entire US.

Looking to the future, the firm’s partnerships and investments, such as with InBev offer the potential for new revenue streams conjoined with existing operations. On that latter front, Altria should continue to enjoy brand leadership in its most recognizable offerings, such as Marlboro, for years to come. Those intangibles come with a real benefit, pricing power and stable and loyal customer base.

Is Altria Stock a Buy?

The consistency with which Altria reports revenues is somewhat earth-shattering. Just above every twelve month period spanning the last 3 years, management has delivered top line sales of $20 billion with a variance limited to approximately 10%. Operating income quarterly has been more up and down, stretching from close to $5 billion to almost $12 billion over the same duration.

With rising earnings per share, the attractive dividend continues to entice investors, and yet the icing on the cake may very well be the upside potential according to a valuation analysis.

Analysts are generally bullish on the firm’s prospects and have a consensus price target of $46.67 per share in place while a cash flows analysis is even more optimistic and has a $54 per share forecast. If the former is reached, the upside opportunity for new investors is 11.9% but it increases to 36.2% based on a DCF analysis.

To confirm the valuation thesis, the price-to-earnings ratio sits at just 8.1x, a low number unless there is a strong forecast for declining revenues, which is not the case at all. Over the next three years, analysts estimate that management will continue to report $20 billion in top line sales.

And with gross margins coming in at 69.8% last quarter, there is little evidence that profitability will go up in smoke like its tobacco products. As a result, investors can be quite confident in the financial prospects and stability of the firm.

Wrap Up

Altria is unquestionably a dividend stock first and foremost now. There is no expectation among investors or analysts that revenues will rise over the coming years but every expectation that profitability will remain elevated and cash flows in the billions will pour in.

For shareholders who have stayed loyal over the past few years, the returns have no doubt been disappointing as the share price substantially lagged the broader market averages. But the tides may turn in 2024 when markets enter choppier waters and the tried and tested companies that have survived all sorts of economic fortunes find their way to the surface again.

It shines brightly on all sorts of key financial metrics from a low PE ratio to high gross margins, and an abundance of cash flows.

If you are on the hunt for a company with a proven track record, remains undervalued and has an attractive dividend yield, you could do a whole lot worse than Altria.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.