U.S. tobacco giant Altria Group (MO 1.45%) recently reported its fiscal 2021 fourth-quarter numbers for the year ending Dec. 31. Altria is one of the best-performing stocks in history, but its days of making investors rich are likely over. Nonetheless, if you're retired or looking for consistent, juicy dividends, you're in luck.
Altria has turned into a cash cow despite the general decline of smoking in the United States. Its dividend offers a 7.1% yield, and there are three reasons that retirees should be able to count on their dividend checks for the foreseeable future.
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1. Fewer smokers, more profits
It's well known that smoking has sharply declined in the United States since the 1960s and 1970s, when consumers became aware of the many health risks of tobacco use. Today, the smoking rate in the U.S. population is less than 20%. And Altria, which sells the leading cigarette brand, Marlboro, with 43% market share, sells fewer cigarettes each year. Its 2021 cigarette volume was 93.8 billion sticks, a 7.5% drop from 2020.
But nicotine's addictive properties have let Altria and other cigarette companies continually raise their prices to offset falling cigarette volume. The chart below illustrates how tobacco product prices have steadily increased for years, while Altria's operating profit margin has grown with it.
U.S. Consumer Price Index: tobacco and smoking products. Data by YCharts. TTM = trailing 12 months.
Altria doesn't need to spend a lot of money on its business; there is little threat from new competitors because tobacco is so heavily regulated, and it's not allowed to advertise cigarette products, so its sales and marketing expenses aren't very high.
The company increases prices just enough to muster steady growth each year. Its earnings per share (EPS) for 2021 increased 5.7% to $4.61, and management expects 4% to 7% EPS growth in 2022, leaning on its ability to raise prices every year. This is plenty of growth to keep this Dividend King going; management has raised the dividend annually for 52 consecutive years and counting.
2. An improving balance sheet provides safety
Companies sometimes make mistakes; Altria made a big one when it paid $12.8 billion in cash for a 35% stake in electronic cigarette company Juul Labs in 2018.
Juul got into a lot of regulatory hot water for how it marketed its products to young people, which derailed its growth plans. Altria had to take significant write-downs on its Juul investment, while the money it borrowed for the acquisition has weighed like an anchor on its balance sheet.
The Juul debacle helps explain why its stock has fallen from its highs in 2017 above $70 a share and why it hasn't recovered. There's now $28 billion in debt on the balance sheet, but things are slowly recovering.
The company's ratio of debt to EBITDA (earnings before interest, taxes, depreciation, and amortization), which measures debt against the earnings of a business, is now 2.3, which is relatively stable for a company that produces so much free cash flow. Its average interest rate on its debt is also pretty low at 4%. Credit agency S&P Global gives Altria's debt a BBB rating, still investment grade.
If it needed cash, Altria still owns about 10% of beer giant Anheuser-Busch InBev, a stake that's currently worth about $11 billion before taxes. Management intends to hold on to its investment but has mentioned it as a potential source of capital if the need comes up.
Retirees can probably feel good about the safety of Altria's dividend. The company can afford it with its free cash flow; the current dividend payout ratio is 78%, which is a bit high but still quite manageable, and these layers of capital on the balance sheet serve as a nice safety net.
3. Buybacks are back
Altria started buying back shares again in 2021, which is a nice bonus for investors. It paused its buybacks in 2020 because of uncertainty about how the lockdowns might affect its business.
Some might question management buying back its stock instead of paying down debt, but remember that Altria's dividend yield is 7.1%. Each share that it takes out of circulation is another share for which it's not paying a dividend. In other words, it's like paying down debt with a 7.1% interest rate. Altria's actual debt has a 4% interest rate, so it's wiser to buy back shares instead of paying down debt.
The buybacks will also help grow EPS, since the company has to spread its net income across fewer shares. It can help Altria continue growing the dividend per share without spending as much total money.
Retirees have it hard in today's investing environment; inflation runs rampant, and things like bonds and savings accounts are getting eaten alive. A high-yielding and reliable dividend stock like Altria can be worth its weight in gold to income-focused investors, and Altria's fourth-quarter earnings show that retirees should be able to continue relying on it.
