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3 Reasons to Buy This Ultra-High-Yield Dividend Stock

By Kody Kester – Dec 30, 2021 at 8:05AM

Key Points

  • The tobacco giant should be able to keep growing revenue and earnings for the foreseeable future.
  • Altria Group offers income investors a whopping 7.6% dividend yield that is sustainable.
  • The stock trades at a forward P/E ratio under 10, which makes it tempting as a value stock.

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Altria Group isn't limited to simply a market-crushing payout.

The English physicist Isaac Newton's first law of motion can also indirectly be applied to dividend investing. Newton's physics standard, which says an object in motion tends to stay in motion, applies to how management at most companies tends to view dividends. To paraphrase, a dividend that is growing each year tends to stay growing with each passing year.

This is the case because no management team wants to be known for slashing a stock's payout once a company has committed to begin paying out dividends. A good example of this notion is Altria Group (MO -2.08%), which has raised its dividend annually for 51 consecutive years. This puts it in the company of just 30 other stocks known as Dividend Kings. Although the company isn't nearly as formidable as it was in the 20th century, it's still raising its dividend consistently.

Let's take a look at three reasons why income investors should take heart in that and consider loading up on shares of the tobacco giant.

A person lights up a cigarette to smoke during the COVID-19 pandemic.

Image source: Getty Images.

1. Steadily growing revenue and earnings

Despite the continued decline in the number of smokers in the U.S. and the related drop in traditional cigarette sales volumes, Altria Group still manages to grow its net revenue and non-GAAP (adjusted) diluted earnings per share (EPS).

Adjusting for trade inventory movements (i.e., pantry stocking last year in the early days of the pandemic), Altria Group's domestic cigarette volumes have declined 5% in the first nine months of 2021. Altria Group's customer base remained loyal to its brands like Marlboro despite meaningful price hikes in its products, allowing the company to maintain a dominant and steady 49% cigarette retail share in the U.S. As a result, Altria Group's year-to-date revenue edged 1.5% higher to $16.03 billion compared to the nine months ended last year. 

Altria Group's non-GAAP diluted EPS through the first nine months of this year advanced 4.5% year over year to $3.52. Aside from a higher revenue base, this boost in profits was made possible by two other factors. First, the company was able to improve its year-to-date non-GAAP net margin by 100 basis points year over year to 40.7%. Second, Altria Group reduced its weighted average diluted shares outstanding by 0.5% to 1.85 billion shares year to date through stock buybacks.

Looking toward the future, Altria Group should be able to continue offsetting cigarette volume declines with price hikes. And even if price hikes reach a point where they can't persist without consumers switching to other brands, the company has other growth mechanisms.

One growth catalyst is the oral nicotine pouch brand known as on!, which has seen its U.S. oral tobacco category share surge from 2% in the second quarter to 3% in the third quarter. Due to consumers wanting alternatives to cigarettes, on! should keep growing nicely in the years ahead.

Depending on the outcome between the plaintiff British American Tobacco and defendants Altria Group and Philip Morris International over the importation of the heat-not-burn IQOS product into the U.S., this could still be a revenue growth stimulant as well.

That's why analysts expect Altria Group will deliver 5% annual earnings growth over the next five years. 

2. A payout secured by huge cash flow

Altria Group appears as though it will be able to generate revenue and earnings growth in the medium term. But it's just as reassuring to know that the company can easily cover its dividend obligation from both non-GAAP EPS and free cash flow.

Altria Group's non-GAAP EPS payout ratio over the last four quarters has been sustainable at 76.3%. This is just below the company's long-term target payout ratio of 80%, which leaves a bit of room for the company to grow its dividend ahead of earnings. 

Altria Group is also generating loads of cash flow for its shareholders, which is evidenced by its 78.5% trailing-12-month free cash flow payout ratio. Since the tobacco industry requires minimal capital expenditures to operate, this is further proof that Altria Group's 7.6% dividend yield is safe.

3. Quality at a bargain valuation

Altria Group is arguably a great business generating tons of cash flow. But does the current share price justify buying the stock?

Altria Group's forward P/E ratio of 9.7 is well below the tobacco industry average of 16.7, suggesting the stock could be a buy. The lower stock price also goes so way to explaining the higher-than-average dividend yield. However, a glance at the stock's growth prospects against its industry is warranted to determine whether this is an attractive valuation. Altria Group's projected 5% annual earnings growth is moderately lower than the industry average forecast of 7%. But because the stock's forward P/E ratio is considerably lower than the industry average, I believe it is a strong buy for both value and income-oriented investors.

Kody Kester owns Altria Group, British American Tobacco, and Philip Morris International. The Motley Fool recommends British American Tobacco. The Motley Fool has a disclosure policy.

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