Most investors who buy Altria Group (NYSE: MO) shares do not do it in the hope of explosive price gains. The share has underperformed S&P 500 years. But the dividend? That’s another story. Altria is a world-class dividend stock with a huge yield and a track record of payout increases that spans more than five decades.
The Dividend King has shown some life this year, climbing above $56 this month to its highest price since early 2022 before falling back to around $50.
That pullback could make this a perfect buying opportunity for dividend-hungry investors looking for double-digit annual investment returns.
Slow. Steady. Reliable.
Many investors see tobacco companies as the old guard of the stock market. U.S. smoking rates have been declining for decades, and it’s well known how terrible tobacco use is for your health. Altria, which sells cigarettes, chewing tobacco and smokeless nicotine products in the United States, still derives the vast majority of its revenue and profits from cigarette sales. Marlboro is Altria’s flagship brand.
But even today, people seem to underestimate the tobacco industry’s resilience. The addictive nature of nicotine and the high regulatory barriers to new entrants have allowed Altria to steadily raise its per-pack prices, more than offsetting the fact that Altria is selling fewer cigarettes each year.
The combination of these price increases and the company’s share buybacks was enough to increase Altria’s free cash flow per share.
No one would mistake Altria for a high-growth company. Its earnings are growing at a rate of low single digits. The bottom line is that the company continues to deliver slow and steady growth. Will it continue to do so forever? No one can be sure. But there are no signs of it stopping anytime soon. Analysts estimate that Altria will grow earnings at a rate of just over 3% per year for the next three to five years.
This is not a yield drop
A company’s management team may be able to choose how much dividend it pays, but it can’t completely control the dividend yield, which also depends on the stock price. Sometimes high yields can entice investors — they can look like easy money. However, a stock’s dividend yield may be high because the market thinks the company can’t afford to keep its payout at its previous level, or because other red flags are driving the stock price down.
In this context, high-yield stocks can prove to be bad investments, especially if the company cuts its dividend. Such low-quality, high-yield stocks that are headed for a payout cut are sometimes called yield traps.
Altria’s dividend yield is high because it grows earnings slowly. The market knows that most of the stock’s return will come from dividends, and the stock price reflects that. Still, Altria is not a yield trap because the payout is safe. The company routinely spends about 80% of its earnings on dividends.
That’s a higher dividend payout ratio than most companies, but Altria’s business requires little investment. It can’t even advertise because of tobacco laws. That unique business model allows Altria to comfortably pay out more of its profits as dividends than most companies.
Market-beating investment returns are possible
Altria has been around for generations and is one of the best performing stocks ever. However, it has underperformed S&P 500 for years. Yet it could become a stock that beats the market again.
Thanks to the AI ​​trend, the S&P 500 has seen a tremendous 31% rally over the past year and is trading at a price-to-earnings (P/E) ratio of 24, well above its historical average. While trying to time the market is often a losing strategy, there could be more volatility in the future and a U.S. recession could cause a market downturn.
Meanwhile, Altria has a fairly easy path to double-digit annualized returns. Based on its current dividend yield of 8.1% and expected annualized earnings growth of 3% to 4%, it could generate returns of between 11% and 12% per year. At a price-to-earnings ratio of less than 9, Altria’s valuation is reasonable enough that investors are less likely to see a dramatic decline in the stock’s valuation. Now that the Federal Reserve has begun cutting interest rates, the market may even support higher valuations for high-yielding stocks like Altria.
Altria stock can provide reliable dividends and even surprise investors with its total return potential. Its slow growth means investors shouldn’t pay too much for the stock, so the recent decline presents a perfect opportunity to add shares while the stock price still makes sense.
Should You Invest $1,000 in Altria Group Now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is It Time to Buy the Dip in This 8.1% Hyper-Yielding Dividend King? was originally published by The Motley Fool
