Is This 9% Dividend Yield Tobacco Stock Finally a Screaming Buy?


Predicting short-term stock price movements is difficult. Some may say it is impossible. Just look at what the stock market has done since 2020. First, it crashed, then it ripped to all-time highs, then it crashed again. Now, in early 2024, the S&P 500 is back to all-time highs due to the artificial intelligence boom. If you’ve held stocks since 2020, you know how stressful stock market volatility can be, especially if you have a large personal portfolio and are close to retirement.

If you are looking to mitigate these risks and eliminate stress, then high-yielding dividend stocks may be right for you. One of the highest-yielding stocks out there is tobacco giant Altria Group (MO -2.03%). It has a dividend yield above 9% as investors have become increasingly concerned about accelerating volume declines of cigarettes in the U.S. And yet, the company just guided for earnings to grow in 2024, with shares up 3% the day it reported fourth-quarter earnings.

With such a high dividend yield, Altria Group may be a screaming buy at these discounted prices. Here’s why.

Volume declines, price increases

Altria Group owns many tobacco brands, but none more important than Marlboro. The top premium cigarette brand in the U.S., Marlboro holds over 40% market share, a share it has held for many years. As cigarette usage has declined for the last few decades, Altria has consistently raised the price of a pack of Marlboros. This not only increases revenue but has led to impressive margin expansion. For example, Altria’s “combustibles” segment had an operating margin of 60% in 2023. That is higher than most software businesses.

Cigarette volume declines have accelerated in the U.S. in recent years, which poses a problem for Altria. In 2023, the company estimated U.S. cigarette volumes declined 8% year over year in 2023. This is much higher than the long-term rate of 2.5%, likely due to the increased prevalence of new-age nicotine products such as electronic vaping and nicotine pouches.

Management has still been raising prices, but 8% volume declines make it difficult to grow sales. Revenue net of excise taxes in Altria’s combustible segment declined 1.6% in 2023. However, with expanding profit margins, operating income was essentially flat year over year. This is the cash engine of Altria’s dividend payouts and will be important to monitor in the coming years. The company can’t rest easy with volumes dropping off at 8% per year, but the headline numbers aren’t as bad as they seem at first glance.

Can new products stabilize revenue?

Eventually, Altria’s cigarette business will be significantly smaller. When this happens, the company will need another source of profits. It hopes to do so through vaping and nicotine pouch products.

Its tobacco-free nicotine pouch product called On! grew volumes by 38.5% in 2023 and had a 6.8% share of the entire oral tobacco space. This helped Altria’s oral tobacco segment grow revenue by 3.8% year over year in 2023 with operating profit growing by 5.5%. The brand is much smaller than Marlboro today but will be important to track over the next few years.

In vaping, Altria just acquired NJOY, one of the leading brands in the U.S. It is too early to tell the financial impact of this acquisition, but Altria plans to grow its distribution around the country, with the brand enjoying a market share of 3.7% in the fourth quarter of 2023. Investors should be tracking this market share number and hope it climbs higher in the coming quarters.

Altria has a long way to go, but there are some decent green shoots with these new products. If they keep growing at a fast clip, they can help counteract the declines of the legacy cigarette business that will eventually become irrelevant.

MO PE Ratio data by YCharts

The stock looks cheap, but is now the time to buy?

At today’s stock price, Altria has a dividend yield of approximately 9.5%. That means investors can get paid around half of their cost basis back in cash over the next five years if Altria maintains or grows its dividend per share over that time period.

Even though cigarette volumes will continue to decline, I think Altria is well suited to maintain its dividend payouts. Operating earnings in the combustibles business are stable, and should remain so if Altria keeps raising prices and expanding margins. This gives the company many years of runway left to grow its nicotine pouch and vaping operations.

At a current dirt-cheap price-to-earnings ratio (P/E) of 8.4, Altria is also repurchasing some of its outstanding shares. In 2023, it spent $1 billion in share repurchases and plans to spend another $1 billion repurchasing shares in 2024. Over the last 10 years, Altria’s shares outstanding are down 11.24%.

Overall, Altria Group looks like a safe dividend income stock at these prices. If you want low volatility and a steady income stream every quarter, this is a good stock for you.



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