Recessions are never ideal, but they've happened repeatedly and will likely continue. As investors, you shouldn't necessarily change your investment strategy, but you can be mindful of which companies are more sensitive to economic turbulence than others.
If we see a recession in 2023 (some may argue we're already in one), tobacco staple Altria Group (MO 0.12%) could provide the stability you crave when times get tough. The company's business model, financials, and valuation make it a stock that might not only hold its own, but could even outrun the broader market.
Proving Altria's consistency
Altria makes and sells smokeable tobacco products like cigarettes and cigars and oral products like chewing tobacco and nicotine pouches. The addictive properties of nicotine have made Altria a controversial but consistent company.
Tobacco's deadly health effects have been known for decades, and the smoking rate in America, where Altria conducts virtually all of its business, has steadily declined. But Altria's continued to grow by raising the prices of its products to make up for selling less volume. You can see below that Altria's operating profits haven't declined by more than 7% in a year in 13 years.
MO Operating Income (TTM) data by YCharts
You could go back further, but Altria spun off Philip Morris International in 2008, which skews the numbers. The point is that Altria's a remarkably consistent company that could hold up far better than most if the economy softens. Some consumers have opted for discount cigarettes as inflation squeezes wallets (Marlboro is a premium brand), but Altria's still delivering on its bottom line.
Stress-testing this theory
Altria's held up over the years, but it's the farthest thing from a growth stock. The stock will probably only appeal to dividend investors, and for a good reason. You can buy shares today and lock in a 7.9% dividend yield. The S&P 500 has historically averaged 10% annual returns, and Altria's dividend matches nearly 80% of that right off the bat.
But what if Altria's business does falter? Can the dividend survive a significant drop in company profits? The company's dividend costs about $6.6 billion annually. Given Altria's $8 billion in free cash flow, that's a dividend payout ratio of about 82%.
MO Total Dividends Paid (TTM) data by YCharts
Altria's cash profits could fall by roughly $1.5 billion and the dividend would still be still covered. Are you a glass-half-empty type of investor? Altria's cash flow could plummet 50%, and there's enough cash on the books to plug that leak. That's before factoring in the company's 10% stake in Anheuser-Busch InBev, worth approximately $12 billion today.
So what does Altria offer you?
Add it all together and Altria can offer investors quite a bit. You're looking at a consistent business model that generates enough yearly cash to sustain a dividend yielding 7.9%. Furthermore, that dividend has multiple financial safety nets if Altria hits unforeseen adversity.
A recession could pressure stock valuations if investors fear for the health of the economy. Altria also checks a vital box here; the company's had some missteps in recent years (which goes a long way to explaining the high yield), and the valuation remains on the low end of where it's traded over the past decade. Investors have already set the bar low at a forward price-to-earnings ratio (P/E) of just over 9, versus a decade median of 17.
MO PE Ratio (Forward) data by YCharts
Stocks could always go lower, but Altria's depressed valuation could mean it will hold up better than others in a shaky market. Analysts believe that Altria's earnings-per-share (EPS) will grow by an average of 4% annually over the next three to five years. That means double-digit total returns if the valuation remains steady, with the potential upside for more if Wall Street views the stock more favorably moving forward.
