Tags: altria | tobacco | stock | dividend | yield

Altria: Top Tobacco Stock With 6 Percent Dividend Yield

corporate logo on altria group website viewed through a magnifying glass
(Piotr Trojanowski/Dreamstime)

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Monday, 26 November 2018 04:46 PM Current | Bio | Archive

The tobacco industry is a favorite among income investors, because tobacco stocks typically have high dividend yields. For example, leading U.S. tobacco stock Altria Group (MO) has a 6.0% dividend yield. In addition, Altria is a strong stock for dividend growth as well. The company has increased its dividend 53 times in the past 49 years.

Altria’s amazing history of dividend growth is due to its strong business model and portfolio of top brands. The company generates far more cash flow than it needs to sustain and grow the business, which allows Altria to return lots of cash to shareholders. Altria’s high dividend yield and consistent dividend growth make it the top tobacco stock.

Leading Brands Across The Portfolio

Altria has a diversified product portfolio, with leading brands in each category. Its core segment is tobacco, where it holds the top cigarette brand in the United States. Marlboro itself captures more than 40% of the domestic retail market. Its smokeable brand portfolio also includes John Middleton and Nat Sherman. Aside from cigarettes and cigars, Altria manufactures chewing tobacco products under the Copenhagen and Skoal brands. It also has a wine business under the Ste. Michelle brand. Lastly, Altria owns 10% of global beer giant Anheuser Busch Inbev.

Altria has generated steady growth to start 2018. In late October (10/25/18), Altria reported third-quarter revenue of $5.3 billion, an increase of 3.3% from the same quarter last year. Net revenue increased 1.0% in the core smokeable products segment, as price increases more than offset a decline in cigarette shipments. Adjusted earnings per share increased 20% last quarter, due to revenue growth, as well as a meaningful boost from share repurchases and a lower tax rate.

Altria generated operating cash flow of $6.56 billion in the first three quarters of 2018. The company utilized only $132 million for capital expenditures, meaning it generated free cash flow of $6.4 billion over the first nine months. Such a high level of free cash flow allows for Altria’s tremendous brands and competitive advantages. Altria has the most valuable cigarette brand in the United States and a broad portfolio of category-leading brands. This allows Altria to raise prices over time. Altria’s business model is also highly resistant to recessions. Tobacco and alcohol sales hold up very well during recessions, which keep Altria’s earnings growth and dividend increases on track.

Going forward, Altria plans to continue growing earnings at a steady and consistent pace. Future growth will be negatively impacted by the decline in smoking that is currently taking place. Altria’s cigarette shipment volume declined by 5% last quarter. As a result, Altria has invested billions in new product development, including heated tobacco products. Altria is currently awaiting regulatory approval from the Food & Drug Administration for its new heated tobacco product line called IQOS. This will help the company adapt to changing consumer preferences.

A Dividend Policy That’s Smoking Hot

Altria is a very shareholder-friendly company, as the management team is committed to providing a compelling dividend yield, and raising the dividend each year. Altria maintains a policy in which it seeks to return approximately 80% of its adjusted earnings per share each year as a dividend. For 2018, the company is expected to generate earnings of $3.99 per share. With a current dividend of $3.20 per share, Altria has an expected dividend payout ratio of 80.2% for this year.

Altria’s dividend policy allows it to maintain a high dividend payout, while leaving itself the option of increasing the dividend, as its earnings grow from year to year. In late August (8/23/18) Altria raised its dividend by 14.3%. This was Altria’s second dividend increase in 2018. The most recent quarterly dividend payout was 21% higher than the same payout last year. Altria has increased its dividend 53 times in the past 49 years.

Final Thoughts

Altria stock has declined 25% in price since the beginning of 2018. This decline has presented income investors with a buying opportunity. Altria’s dividend yield has risen to 6.0% due to the dropping share price. Altria will also provide dividend growth down the road, thanks to its leading brands and strong business model.

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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BenReynolds
Altria’s dividend yield has risen to 6.0% due to the dropping share price. Altria will also provide dividend growth down the road, thanks to its leading brands and strong business model.
altria, tobacco, stock, dividend, yield
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2018-46-26
Monday, 26 November 2018 04:46 PM
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