Tobacco stock Altria (MO 0.12%) continually trades at a cheap valuation. Perhaps it's the threat of regulation or a decline in smoking, which is at its lowest level in decades.
The stock's price returns have disappointed over the past six years, but shares have still returned more than 20% annually over the past five decades, creating staggering wealth over time.
Indeed, Altria's best days are probably behind it, but investors can still take advantage of the same basic recipe that has given the stock fame and its shareholders fortune.
Some might pass on the stock for personal reasons, and that's understandable. For others, the stock could be a buy today, and here is why.
Altria is still playing with house money
Sometimes it seems like investors take Altria's legacy cigarette and cigar business for granted. The company made waves with its investment in e-cigarette maker Juul. It owns 10% of Anheuser-Busch InBev (BUD 0.13%), the world's largest beer company, and jumped into oral nicotine pouches. But smokeable products still generated 86% of the company's operating profits in the first quarter of 2023.
Management made a massive mistake and invested $12.8 billion in Juul, yet operating profits are still billions higher today than when the deal was made in late 2018. Altria has made mistakes, but the smokeable products business is so strong that it didn't change much for the company.
MO operating income (TTM) data by YCharts. TTM = trailing 12 months.
The company's dividend costs $6.6 billion yearly, which gives Altria roughly $5 billion in annual profits left over to fund new projects, repurchase shares, and pursue other goals.
The regulations on tobacco mean that Altria can't spend to market its smokeable products. So its low-maintenance yet steadily growing tobacco profits are about as close as investors can get to house money in a company. That part of the business has persisted for many decades, and while it probably won't last forever, it's also probably premature to forecast its demise.
An easy 8% yield
This steady business pumps out billions in profits, and it doesn't require much investment to stay running. As a result, investors get a generous dividend that yields more than 8% today. And Altria is a Dividend King, having raised the payout annually for over 50 consecutive years.
You saw above how Altria's steady operating profits easily cover the dividend. Using a traditional dividend payout ratio, it accounts for about 80% of cash flow, so the company can pay interest on debt, reinvest into the business as needed, and still have a solid buffer.
Most high-yield dividend stocks are potential traps. Investors aren't as confident in the company and demand a higher yield as compensation for holding a riskier stock. But Altria's dividend is financially rock solid, barring an unforeseen and sudden implosion.
Altria's secret sauce is perpetual negativity
The sentiment toward Altria is usually negative, which keeps the stock at a depressed valuation. Most high-yield stocks are cheap for financial reasons, which means these companies usually can't grow the dividend over time, let alone sustain it.
Altria is cheap, however, mainly because of the stigma it carries. But where else can you get an 8% dividend yield, receive a yearly increase between 2% and 6%, and reinvest those dividends at absurdly low prices?
Earnings per share (EPS) were $3.39 in 2017, a price-to-earnings ratio (P/E) of more than 20 if you bought at Altria's highs near $70 back then. But today, the stock trades at $45, yet will have EPS around $5, for a P/E of just 9. That's a much better setup for investment returns.
Eventually, Altria must financially break away from its smokeable products. But that doesn't mean the business can't stay profitable in the meantime -- and that could help the stock as well.
