A lot of investors worry about Altria Group (NYSE:MO) because they believe cigarettes are a dying industry. However, that couldn't be further from the truth. With its full-year 2020 report released last week, the tobacco conglomerate is showing again why its business is more resilient than people think, and why it is the ultimate stock for income-seeking investors. 

Three cigarettes on a bed of tobacco

Image source: Getty Images.

Full-year 2020 results

On Jan. 28, Altria released its fourth-quarter and full-year 2020 results. Total revenue for 2020 was $26.1 billion, up 4.2% from 2019. Adjusted earnings per share (EPS), which adjusts for short-term changes in the company's outside investments, was $4.36, up 3.6% from 2019. At a current stock price of $41.70, that gives Altria a price-to-earnings (P/E) ratio of 9.6, significantly below the S&P 500 average of 39.

The main driver of sales/earnings growth was Altria's smokeable (cigarettes and cigars) business. Revenue for the segment was up 5% to $23.1 billion in 2020, while profits were up 10.8% to $10 billion. Marlboro, which is the majority of this segment, actually saw its industry market share drop from 43.3% to 43% in 2020, but the company was able to offset this decline with price increases. This pricing power is why Altria has been able to grow its EPS over the last two decades even with cigarette volumes getting cut in half since 2000. 

Is the dividend sustainable?

At an estimated 8.2% yield, some investors might worry that Altria's dividend is unsustainable. The current payout is $3.44 per share, or around 78.8% of the company's 2020 adjusted EPS. This is just below its goal to pay out 80% of its adjusted EPS as a dividend, which should show investors that not only is Altria's dividend sustainable, but it will likely go up in the coming years.

The biggest concern with Altria and its dividend is the company's long-term debt. At the end of 2020, the company had close to $30 billion in debt, which it will need to pay back or refinance before paying out any dividends to shareholders. However, if you look at when all the debt is due, Altria does not owe more than $1.5 billion in debt in any given year, which it likely can manage while also paying out its 80% adjusted EPS dividend target. 

Lastly, Altria's board just authorized a $2 billion share repurchase program as another way to return capital to shareholders. The program ends in June of 2022 and should help reduce the company's share count by a few percentage points, thereby increasing the profits attributed to each share held by investors. 

Where do they go from here?

With a slowly declining cigarette business, Altria will eventually need to move away from its Marlboro brand into other revenue streams. Luckily, the company has a few initiatives that could help mitigate the declines. Two include its investments in JUUL (the number-one vaping brand in the United States) and Cronos Group, a publicly traded cannabis producer. Altria paid $12.8 billion for a 35% stake in JUUL in 2018, but has written down its investment many times, including by $2.6 billion in 2020. This is concerning, as the company likely overpaid for its equity stake, but the investment can still act as a hedge if vaping continues to take market share from combustible cigarettes. Altria owns 45% of Cronos Group, which is currently worth $1.8 billion.

Altria also has a tobacco-free nicotine pouch product called on! that is a part of its push to slowly move away from smokeable products. The pouches are now available in 78,000 retail stores nationwide and have a 2.4% market share for the oral tobacco category. Investors should look for both these numbers to increase over the next few years if the product is eventually going to become meaningful to Altria's financials.

Overall, while the popular narrative is that tobacco is a dying business, the recent results from Altria show that its profitability is actually increasing. With consistent cash generated by its cigarette business, Altria can pay out its large dividend while also investing for growth in vaping, nicotine pouches, and cannabis. With its 8.2% dividend yield, the company currently looks like a great stock for income-seeking investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.