Tobacco stocks have long been a haven for income investors, due to their consistently strong profitability and hefty dividend payouts to shareholders.
One tobacco company in particular that stands out is Altria Group (MO), which has handsomely rewarded its investors for decades.
Altria has increased its dividend 53 times in the past 49 years. In addition to its dividend growth, Altria is a high-yield stock with a dividend yield of 6.2%.
There are not many stocks that provide investors with Altria’s combination of annual dividend increases plus a very high dividend yield. This makes Altria a uniquely appealing stock for dividend growth investors.
The Secret of Altria’s Success
Altria primarily benefits from massive competitive advantages. First, it operates in an industry that offers superior economics. Tobacco companies reap huge economies of scale, from relatively low capital expenditure requirements. Furthermore, Altria possesses tremendous brand loyalty and pricing power, thanks at least in part to the fact that the company sells addictive products. This allows Altria to raise prices each year like clockwork, even during recessions.
These characteristics result in a free cash flow machine. For example, Altria generated operating cash flow of $8.39 billion in 2018, but needed just $238 million in capital expenditures for the year. This led to free cash flow of $8.15 billion for the year, or roughly 32% of revenue generated for the year, a very high level of free cash flow relative to sales.
Altria’s huge cash flow allows it to return a great deal of cash to shareholders each year. It does this with dividends and share buybacks. Altria pays a current annual dividend of $3.20 per share. This equates to a current dividend yield of 6.2%, which is more than three times the average dividend yield of the S&P 500 Index. Separately, Altria utilized $1.67 billion to repurchase 27.9 million shares last year. As of December 31st 2018, Altria had approximately $345 million remaining in the current $2 billion share repurchase program, which the company expects to complete by the end of the 2019 second quarter.
Dividend Yield And Growth In One
Future dividend growth may slow for Altria a bit, as the company digests a pair of massive strategic investments placed in 2018. First, Altria announced a $1.8 billion investment in Canadian marijuana producer Cronos Group. Altria purchased a 45% equity stake in the company, as well as a warrant to acquire an additional 10% ownership interest in Cronos Group, exercisable over four years from the closing date.
Separately, Altria invested $12.8 billion in e-vapor manufacturer Juul Labs for a 35% equity stake, valuing Juul at $38 billion. Altria also has its own heated tobacco product line called IQOS, for which it is awaiting regulatory approval from the FDA.
Altria’s dividend is secure, with plenty of room for future increases. The company has a target payout ratio of approximately 80% of annual adjusted earnings-per-share. Last year, Altria maintained a dividend payout ratio of 75% based on adjusted EPS. As a result, Altria should be able to continue increasing its dividend each year.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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