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Motley Fool Issues Rare “All In” Buy Alert
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Turbulent markets like what we’ve seen in 2022 are a reminder of just how important peace of mind can be for investors. Retirees or others looking for dividends can look at tobacco staple Altria Group (MO 0.02%) to stabilize their portfolio and put some money in their pockets.
The stock is down just 4% in 2022 and pays investors a juicy 8.5% dividend yield. A dependable dividend with such a high yield might appeal to investors more as Wall Street heads into 2023 with some uncertainty.
Altria isn’t a stock for everyone, but here is why those holding it can sleep well at night, knowing that their investment is generating reliable dividend income.
Zoom out enough, and you’ll see that Altria’s been a rough stock to hold over the past five years. The share price is down 32% over that period, the result of Altria’s disastrous failure of acquiring a stake in electronic cigarette company Juul for roughly $13 billion in 2018 and seeing its value vaporized by regulators shortly after.
MO PE Ratio (Forward) data by YCharts.
But that was then; today, Altria’s stock reflects that mistake with a price-to-earnings ratio (P/E) of just over 9, well below the stock’s median P/E over the past decade (P/E of 17). That doesn’t mean that the stock price can’t go lower, but the discount to Altria’s long-term norms could be a margin of safety — the bad news is priced in.
That could be one of the reasons why Altria’s held up this year. I suspect that if the stock traded at a higher valuation — say, above its decade-median, it would have come down more in this bear market.
Americans have known that cigarettes are terrible for your health since the 1960s, yet Altria keeps making more money. Altria shipped 136 billion units of smokable products in 2012, compared to just 95 billion in 2021. However, operating profits on smokable products grew from $6.2 billion to $10.4 billion. That underlines how much pricing power Altria has due to the addictive nature of its products.
Those price increases have carried Altria’s financials for years, making it a Dividend King with 52 years of consecutive increases:
MO Cash Dividend Payout Ratio data by YCharts.
Investors might fear the 81% dividend payout ratio, but they shouldn’t worry too much. Altria’s business doesn’t require much capital; it can pump out the vast majority of its profits to shareholders and still operate just fine. It’s a boring business but has proven very effective at putting cash in investor pockets.
It seems reasonable that Altria’s rinse-and-repeat model of increasing prices won’t work forever, and management understands that — look at Altria’s investments in Juul and Cronos Group as evidence of trying to diversify the business. Altria is still working to build a future beyond cigarettes, and investors will need to monitor that over the long term. However, the company has a large lever to pull if it needs more cash.
Altria owns a 10% stake in global beer conglomerate Anheuser-Busch InBev, which carries a market value of approximately $11 billion at today’s share price. Should Altria move to sell that stake, the resulting cash would be equivalent to roughly one-eighth of Altria’s market cap, enough to buy back a ton of shares or pay down a lot of debt. Altria could virtually undo the debt it took on when it invested in Juul.
Altria has chosen to hold onto its stake, but that could change if Anheuser-Busch’s stock appreciates over the coming years. Management’s use of that capital could play a significant role in the stock’s future investment returns.
But for now, Altria shareholders can buy the stock with confidence for its 8.5% dividend and sleep well knowing that those generous dividend checks will arrive every three months.
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.
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