Building a portfolio of quality businesses that send you steadily growing passive income year after year is the secret to attaining financial freedom. That's because this dividend income can be used to pay your bills, which can open up a world of possibilities that you may not have had otherwise.
The tobacco giant named Altria Group (MO -0.37%) is an excellent stock for income investors to consider buying. Let's take a look at the Dividend King's fundamentals and valuation to elaborate on what makes this the case.
Incredible brand power and price hikes led to improved profitability
Altria Group is best known for its crown jewel, the Marlboro cigarette brand. But the company's brand portfolio runs even deeper. Altria Group also owns the leading moist snuff tobacco brand called Copenhagen, a leading oral nicotine pouch brand called on!, and the leading tipped cigar brand called Black & Mild.
The Richmond, Virginia-based company recorded $5.1 billion in revenue net of excise taxes in the fourth quarter ended Dec. 31, 2022. This was marginally lower by 0.1% over the year-ago period.
Altria Group's smokeable products segment (i.e. Marlboro) revenue net of excise taxes was flat at $4.5 billion for the fourth quarter. Factoring in trade inventory movements, calendar differences, and less customer disposable income from elevated inflation, total cigarette volume shipments were down by approximately 9% during the quarter. But price hikes on its products were able to offset these volume declines, as they have for many years now. This is how smokeable products segment revenue remained basically even in the quarter.
Altria Group's revenue net of excise taxes within its oral tobacco products segment dipped 4% for the fourth quarter to $604 million. Due to calendar differences and trade inventory movements, the oral tobacco products segment experienced a 3.5% shipment volume decrease during the quarter. Price increases weren't enough to offset a higher percentage of lower revenue on! sales mix versus moist snuff tobacco. That explains the modest drop in oral tobacco products segment revenue in the quarter.
Altria Group's non-GAAP (adjusted) diluted earnings per share (EPS) surged 8.3% higher year over year to $1.18 for the fourth quarter. Thanks to the company's prudent cost management, its non-GAAP net margin expanded by nearly 240 basis points over the year-ago period to 41.6% during the quarter. Coupled with a 2.3% reduction in Altria Group's outstanding share count from share buybacks, this explains how adjusted diluted EPS grew at a much faster rate than revenue net of excise taxes in the quarter.
Altria Group is working to position itself for the future via its recent deal with Japan Tobacco (JAPAF 4.32%) to market its Ploom electronic cigarette device in the U.S. The product likely won't be approved for a few more years by the U.S. Food and Drug Administration. But in the meantime, analysts anticipate that Altria Group will generate 4.6% annual adjusted diluted EPS growth over the next five years. This isn't too far below the tobacco industry average earnings growth forecast of 6%.
A well-covered and growing payout
Altria Group's 7.9% dividend yield is a whopping five times the S&P 500 index's 1.6% average yield. And this yield doesn't come with a sacrifice of dividend growth: Altria Group's quarterly dividend per share has nearly doubled over the last 10 years to $0.94.
MO Dividend data by YCharts
With the dividend payout ratio positioned to clock in near 75% for 2023, the payout ratio is below the company's stated target of 80%. This means that plenty more mid-single-digit dividend increases should lie ahead for Altria Group's shareholders. Considering the outsized dividend yield, that is arguably a healthy dividend growth rate.
The stock's current valuation is a deal
Altria Group's business model isn't flashy and it isn't for the faint of heart. And the stock's valuation seems to reflect these points.
Altria Group's forward price-to-earnings (P/E) ratio of 9.4 is well below the industry average forward P/E ratio of 13.5. Such a conservative valuation prices in the risks of accelerating cigarette volume declines, in my opinion, which makes the stock a buy for income investors.
