The logistics of getting started as an investor have never been easier.
With the introduction of fractional shares years back, there's really no excuse for those with an adequate emergency fund and a few spare dollars lying around to not begin investing. For those who want to avoid fractional shares, however, shares of Altria Group (MO 1.45%) are currently trading hands for less than $50. Let's examine the company's fundamentals to better understand what makes Altria Group an intriguing buy for income investors.
The company is becoming more profitable
The tobacco industry is among the most lucrative in the investment universe. For better or for worse, that is because of the addictive nature of the nicotine contained within tobacco products. And Altria Group stands out as the most profitable company in its industry.
MO Operating Margin (TTM) data by YCharts
The U.S. pure-play tobacco company owns leading brands, including Marlboro cigarettes, Juul e-cigarettes, on! oral nicotine pouches, and Copenhagen moist snuff tobacco. This tremendous brand power allows the tobacco company to implement price hikes to offset volume declines that have persisted for decades.
Volume declines as a result of the market in which it operates have caused Altria Group's management to find ways to become more efficient at cutting unnecessary costs. The most recent example was when the company's total operating costs fell 8.2% in 2022 to $8.8 billion.
Careful cost cuts paired with price hikes pushed Altria Group's operating margin from the low 50% range five years ago to the high 50% range most recently. For context, that is considerably better than the respective high 30% and mid 50% operating margins posted by British American Tobacco (NYSE: BTI) and Philip Morris International (NYSE: PM).
Altria Group isn't the most exciting investment out there. But its recent move to partner with Japan Tobacco (JAPAF 4.32%) and market the latter's Ploom e-cigarette in the U.S. could breathe life into its growth prospects starting in a couple of years. That's why analysts believe that Altria Group's non-GAAP (adjusted) diluted earnings per share (EPS) could grow by 4.6% each year over the medium term.
Slow and steady (dividend growth) wins the race
Altria Group's 8% dividend yield dwarfs the S&P 500 index's 1.7% yield. But such a huge dividend yield raises the following two questions: Is the dividend safe? And can it keep growing in the future? For this Dividend King, I believe the answers are yes and yes.
This is supported by Altria Group's dividend payout ratio, which is poised to come in at around 75% in 2023. Adding some color to this payout ratio, that's below the company's targeted payout ratio of 80%. This gives Altria Group the funds needed to repurchase shares, repay debt, and deploy capital into projects or acquisitions that could be growth catalysts for the business.
The dividend likely won't double over the next 10 years as it did previously. But with such a huge starting yield, it doesn't have to for Altria Group to be a great dividend investment. The mid-single-digit annual dividend growth that I anticipate for the foreseeable future should do the trick.
A dirt cheap valuation
Altria Group is a well-run business. And the modest valuation appears to seal the deal to make it a buy for yield-oriented investors.
This is because Altria Group's forward price-to-earnings (P/E) ratio of 9.4 is significantly below the S&P 500 tobacco industry average forward P/E ratio of 12.7. That arguably prices in the biggest risk facing the company, which is being behind the curve in next-generation products versus its peers.
