While stocks have generally been under pressure lately, Altria Group (MO 2.07%) has held up better than most. Despite long-term challenges facing the company as more people give up smoking, the tobacco giant's solid near-term outlook and generous dividend suggest that shares could continue to hold up well in the face of volatility for the broader market.
With the stock offering a massive 8.3% yield at current prices, should investors be loading up on this dividend-paying industry stalwart? Or are there too many risks to the company's business to make it a suitable long-term investment candidate? Read on for a look at bullish and bearish scenarios and catalysts for the tobacco giant's stock.
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Bull case: Altria looks cheap and pays a big dividend
Anchored by the Marlboro brand, Altria controls the lion's share of the U.S. tobacco market. The company's cigarette products generate very strong margins, and it's likely that the business will continue to serve up solid performance even if the broader operating backdrop in 2023 winds up being shaped by a prolonged recession.
The combination of brand strength and the addictive nature of its products likely positions Altria's business to hold up fairly well amid worsening economic conditions, and its fantastic dividend profile is a testament to the company's resilience through thick and thin. In August, the company delivered a 4.4% dividend increase that boosted its quarterly payout per share to $0.94.
With the raise, the company cemented its 53rd straight year of consecutive annual payout growth and its 57th overall payout increase across the stretch. Only a handful of companies have a better dividend-growth track record, and the case could be made that Altria has the best overall dividend profile on the market. That 8.3% dividend yield is enticing.
With a market cap of roughly $80 billion and free cash flow (FCF) of roughly $8 billion over the trailing twelve-month-period, Altria looks attractively valued and well positioned to continue delivering payout growth. Shares trade at a little under nine times this year's expected earnings, and the business is primed to serve up strong income generation in the coming years even with unit-volume for cigarettes declining.
MO PE Ratio (Forward) data by YCharts
What's more, Altria is continuing to invest in moving beyond cigarettes, and the market seems to be pricing in very little chance that the company is successful on that front. If the tobacco giant can score even moderate wins in new product categories, investors will likely be willing to assign much stronger multiples to the company's valuation.
Bear case: Unit volume declines and diversification duds
While the company managed to increase earnings per share at a 7.9% compound annual growth rate from 2017 through 2021, the revenue trajectory over the last five years highlights the challenges that Altria is facing amid declining cigarette sales volume. Revenue is up just 5.7% over the last five years, and a 3.5% year-over-year sales decrease in the company's most recent quarter highlights the likelihood that revenue will be pressured going forward.
MO Revenue (TTM) data by YCharts
Altria's earnings growth recently has been largely driven by stock buybacks. With the company generally relying on pricing increases as the other main component of earnings and sales growth, it's fair to say that there isn't a strong profit-expansion engine here. Despite brand strength and the addictive nature of its products, there's a limit to the extent that it can continue to raise prices -- just as there's a limit to the extent that it can lean on stock buybacks as its other main driver of earnings expansion.
The company also carried roughly $26.3 billion in total debt on its books at the end of the last quarter. While the company is generating ample free cash flow and doesn't look to be in a precarious financial position, the debt load indicates that the company may feel some pressures from the higher interest rate environment.
In addition to regulatory risks facing its core business, the company's moves to expand beyond the shrinking cigarette market have generally been costly failures. Altria has taken billions in write downs on its investments in cannabis company Cronos Group and vape company Juul, and it has yet to record a big success in its efforts to move beyond its core smoked-tobacco business.
Should you buy Altria stock?
If for whatever reason you're not interested in having exposure to the tobacco industry, Altria stock is obviously a no-go. Beyond that potential snag, the company also has a relatively high level of debt, and it faces the challenge of declining sales volume for its core products as people increasingly move away from smoking.
But for investors seeking companies that can hold up fairly well amid challenging economic conditions, buying the stock could be the right move. Altria trades at low price-to-earnings multiples, pays a huge dividend, and has a strong moat in its industry. With the potential for a prolonged recession in 2023 looming, now could be a good time to increase holdings in defensive, high-yield stocks.
