There's a common saying in the personal finance community: Money is freedom. This is because when individuals have enough money, they are free to spend time doing whatever they would like to do, with whomever they would like, for as long as they like.

Buying dependable dividend-paying stocks is one way to reach financial independence, which is the point at which your passive income matches or exceeds your expenses. Altria Group (MO 0.32%) has raised its annual payouts for 53 consecutive years, putting the tobacco giant among just 48 Dividend Kings -- companies that have raised their dividends annually for at least 50 years straight.

Let's dig into why the company could be a buy for income-oriented investors. 

Altria Group's profits continue to grow

Led by its top-selling Marlboro cigarette brand and secondary brands like Parliament, Altria Group is the unquestioned leader of the U.S. combustible tobacco industry. As of March 31, it held a 47% share of the U.S. retail cigarette market.

Altria Group's revenue net of excise taxes dipped by 1.2% year over year to $4.8 billion during the first quarter. It reported a 9% decline in domestic cigarette shipment volume in the quarter when adjusting for trade inventory movements and calendar differences. In addition to industry trends, it also cited high inflation as a factor in the accelerated volume decline.

These results speak volumes about the pricing power of Altria Group. By raising prices, the company came close to compensating for its significant drop in domestic cigarette shipment volumes. Its smokeable products segment revenue net of excise taxes fell by just 1.4% for the quarter to $4.2 billion.

The company's oral tobacco products segment recorded $600 million in revenue net of excise taxes during the first quarter, which was up 2.7% over the year-ago period. Altria Group's domestic shipment volume for the segment fell by 3% (adjusted for calendar differences and trade inventory movements). With such a minimal volume decrease, it's not a surprise that price hikes were able to power the top line higher within this segment.

Q1 2023 Net Margin Q1 2022 Net Margin
44.5% 42.5%

Data source: Altria Group Q1 2023 earnings press release

The company's non-GAAP (adjusted) diluted earnings per share (EPS) grew by 5.4% year over year to $1.18 in the quarter. As has been the case for many years now, Altria Group's unflashy revenue net of excise taxes results were more than offset by two tools in the company's growth toolbox. Cost-cutting helped boost Altria Group's non-GAAP net margin by roughly 200 basis points. This metric is encouraging because it shows that while the company has struggled to generate revenue net of excise taxes growth, it is keeping its cost of sales and marketing, administration and research costs in check.

Reductions in the outstanding share count due to stock buybacks also entitled shareholders to a bigger piece of the steadily growing profits. This explains how adjusted diluted EPS rose despite dwindling revenue net of excise taxes for the first quarter.  

Analysts predict that Altria Group will deliver an average of 4.6% annual adjusted diluted EPS growth over the next five years. The company will launch the Ploom e-cigarette in the U.S. within the next few years in partnership with Japan Tobacco. This is undoubtedly a later entry into the U.S. e-cigarette game, which could make it difficult for the company to seize market share. But if any two companies have the marketing might and resources to pull it off in a competitive space, Altria Group and Japan Tobacco would be the most likely picks.

The market-crushing dividend is fairly secure

Altria Group's 8% dividend yield might worry investors at first glance -- it's far higher than the S&P 500 index's 1.7% yield. But in my opinion, the company's dividend is the exception to the rule for income investors of "If something seems too good to be true, it usually is."

This is because Altria Group's dividend payout ratio is on track to come in at around 75% in 2023. That will leave the company with the capital necessary to strengthen its product portfolio with acquisitions, repay debt, and repurchase shares.

MO Total Return Level Chart

MO Total Return Level data by YCharts

The one big caveat that could help to explain Altria Group's huge dividend income is that its total returns have greatly lagged the S&P 500 index in the past five years as illustrated above. This was largely the result of the company's failed acquisitions in recent years. Most prominently, Altria Group's $12.8 billion acquisition of a stake in the vaping company named Juul was written down to zero due to regulatory crackdowns and legal settlements. For investors comfortable with the trade-off of dependable income for potential underperformance in share price appreciation, it could make sense to buy Altria Group stock.

A deeply undervalued stock

Altria Group does face the risk that its shipment volume declines could accelerate further, which could break the investment thesis if reduced risk product revenue can't make up the difference. But this risk arguably is already priced into the stock, making it a buy for income investors. Altria Group's forward price-to-earnings ratio of 8.9 is already much lower than the tobacco industry's average ratio of 15.8.