Volatility is a measure of how fast something changes in value. In the stock market, this means how fast an individual stock -- or the entire stock market -- is moving up or down in a certain period. 2020 was a period of high volatility for the stock market, with the precipitous fall in prices during March and then the rapid increase throughout the rest of the year, while 2017 was famously the least volatile year ever in the stock market.
Some investors are comfortable investing in stocks with higher volatility. Others would rather buy stocks with low volatility, dependable earnings, and steady dividend payouts. Here's why Altria Group (MO +0.72%) is a great low-volatility stock to add to your portfolio today.
Counteracting volume declines through steady price hikes
Altria Group is the parent company for various tobacco, cannabis, and nicotine brands. Most importantly, it is the owner of Philip Morris USA, which sells the famous Marlboro cigarette brand. Marlboro has slightly over 40% market share for cigarettes in the United States, a position it has held for decades.
Cigarette volumes are declining in the United States. This has been a trend ever since the public became aware of the terrible health consequences of smoking and has affected Altria's volumes each year, with total cigarette shipments declining by 4.4% a year since 2012.
To counteract these declines, Altria has been able to consistently raise prices on the packs of its cigarettes with little to no demand destruction from its core customers. In fact, over the last 10 years, Altria's annual revenue is up 18%, which is not modest but better than you would likely expect when seeing those volume decline numbers.
Profit growth has been even better. Since higher prices equal more profits per pack sold (all else equal), Altria's operating margin has expanded steadily over the past 10 years, leading to 52% operating income growth. This dynamic gives tobacco companies a long runway of profit generation left even if cigarette volumes continue to decline -- a likely scenario -- over the next few decades.
NYSE: MO
Key Data Points
Potential of nicotine pouches
Even though Altria has a proven strategy of raising prices at a faster rate than volume declines, cigarettes are still on a trajectory of extinction in the United States a few decades from now. Obviously, this is bad news for the Marlboro brand.
Luckily, Altria has a few safer nicotine products that are starting to become much larger portions of this business, with none more important than its tobacco-free nicotine pouch brand called On!.
On! volumes grew 72.3% year over year over the first nine months of 2022 to 72.6 million cans, making it 4.8% of the entire oral nicotine market in the United States. This is much smaller than Altria's cigarette business, but if On! continues to grow at these impressive rates, it will start becoming a meaningful revenue driver within a few years.
Plus, with how profitable oral tobacco can be (Altria's oral tobacco products routinely hit 70% operating margins), On! has the chance to become a real earnings driver for Altria's business as well.
Dividends + keeping returns steady
Altria's stock has extremely low volatility, trading around a band of $40 to $60 a share over the last five years or so. You might ask: Why would I want to buy a stock that hasn't gone up? The answer is Altria's extremely high dividend payouts.
Right now, Altria's dividend is yielding over 8%, providing a steady albeit modest return for shareholders each year even if the stock goes nowhere.
MO Dividend Per Share (TTM) data by YCharts
The company has a consistent track record of growing its dividend payouts as well. Over the last 10 years, its dividend per share is up 110%, which will likely continue in the future as the quarterly dividend payout is consistently raised.
With steady price increases, the potential of nicotine pouches, and a high dividend yield, Altria Group looks like a quality low-volatility stock for your portfolio.
