Income investors would be well-advised to select only the highest-quality dividend stocks with proven business models that generate tons of earnings. That's because these stocks are most likely to steadily pay out ever-higher dividends to their shareholders.
As a Dividend King with a track record of 51 straight years of dividend increases, few stocks can match the stability of the tobacco titan Altria Group (MO 1.91%). But is this high-yield dividend stock a buy for yield-hungry investors? Let's dive into Altria Group's fundamentals and valuation to answer the question.
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Net revenue and earnings keep moving higher
While Altria Group's traditional cigarette volumes continued their decline in 2021, the company was once again able to produce higher revenue net of excise taxes and non-GAAP (adjusted) diluted earnings per share (EPS).
When factoring in the trade inventory movements (such as consumer pantry stocking in early 2020 due to COVID-19) and calendar differences, domestic cigarette shipment volumes declined 6% over 2020. The good news for Altria Group is that its total cigarettes retail share only declined 30 basis points year over year to 48.8% in 2021. A 20-basis-point increase in Marlboro's market share to 43.1% was slightly more than offset by a 50-basis-point decline in discount cigarettes to 3.4%. Finally, Altria Group's other premium cigarette market share was unchanged at 2.3%.
Altria Group's steady market share gives it exceptional pricing power, which it demonstrated in 2021 by passing production cost increases along to its consumers through higher prices. This is what allowed the company's total revenue net of excise taxes to edge 1.3% higher year over year to $21.11 billion in 2021.
Altria Group's price hikes were only partially offset by higher costs, which explains how the company was able to grow its non-GAAP net margin by 140 basis points to 40.4% in 2021. Combined with its slightly higher revenue base and a lower weighted average diluted share count, Altria Group's non-GAAP diluted EPS advanced 5.7% higher to $4.61 in 2021.
Looking ahead, analysts anticipate that Altria Group will be able to deliver 5.4% annual earnings growth over the next five years. This encouraging growth forecast is due to the company's strong brands and pricing power.
A payout with room to grow
Just because Altria Group looks set to keep growing revenue and earnings for the foreseeable future, that doesn't necessarily mean the stock's massive 7.1% dividend yield is safe.
Fortunately, Altria Group's non-GAAP diluted EPS payout ratio last year was 75.5%, which was just below the company's long-term target of 80%. This gives Altria Group a cushion to maintain its dividend through just about any situation.
As further evidence that the dividend does appear safe, Altria Group's free cash flow payout ratio was 77.9% in 2021. This again leaves the company a margin of safety to navigate through most operating environments, which explains how it has been able to grow its dividend for more than half a century.
A well-run company trading at a discount
Altria Group's track record and fundamentals point to a company of excellent quality. But I believe what cements the case that the stock is a buy is that its valuation is far lower than its industry average.
Altria Group trades at a forward price-to-earnings ratio of 9.8, which is significantly lower than the tobacco industry average of 18. Astute investors may theorize that the reason for this major discrepancy between Altria Group's valuation and its industry is that the former's growth prospects may be much lower than the industry average. However, this doesn't appear to be happening.
That's because Altria Group's anticipated 5.4% annual earnings growth rate is only a bit lower than the industry average of 8%. Altria Group's unmatched track record in its industry of raising dividends should result in meaningful valuation upside, which makes it a solid buy for retiree investors and value investors alike.
