If done with caution and due diligence, investing in ultra-high-yield dividend stocks can be a great way for investors to turbocharge their passive income. But it is very important to emphasize the first part of that statement because many such stocks are yield traps, with their payouts at great risk of being cut.
The tobacco giant Altria Group (MO -0.37%) offers shareholders an outsize dividend and a track record as a Dividend King. But should income-seeking investors buy the stock? Let's explore Altria's fundamentals and valuation to see if an answer can be found.
Altria Group is making moves
When investors think about Altria Group, they probably envision a business that is predominantly dependent on the sale of cigarettes for most of its revenue and profits. Since the company derived approximately 90% of its $25.1 billion in 2022 revenue from smokable brands like Marlboro cigarettes and Black & Mild cigars, this assessment is accurate.
But the good news for shareholders is that after the wealth-destroying acquisition of vaping brand Juul in 2018, management appears to have learned its lesson. The company is now making smaller and more-measured acquisitions to complement its existing smoke-free tobacco brands like Copenhagen snuff tobacco and on! oral nicotine pouches.
Altria Group set a goal to roughly double its U.S. revenue from smoke-free products to $5 billion a year by 2028. The company intends to hit the goal with its recently completed $2.7 billion acquisition of e-vapor brand NJOY Holdings. As the product picks up momentum in the marketplace to eventually be available in up to 70,000 U.S. retail stores, management expects the deal to be profitable by 2026.
The continued growth of on! oral nicotine pouches' market share from 4.1% in the first quarter of 2022 to 6.5% in the first quarter of 2023 also bodes well. Altria's new type of heated tobacco product, SWIC, that doesn't resemble a cigarette could be a winner years down the road as well.
For these reasons, analysts believe the company's adjusted diluted earnings per share (EPS) could grow at a mid-single-digit rate annually over the next five years. Beyond that, similar growth could be sustained as Altria Group aspires to compete in the international smoke-free and non-nicotine categories. The company is assessing these opportunities and expects to begin moving on them within the next 12 months.
Image source: Getty Images.
Profits support its massive payout
For investors seeking huge starting income, Altria Group's 8.4% dividend yield stacks up quite well against the S&P 500's 1.5% yield. Surprisingly for a yield so high, the company's payout is reasonably secure.
The dividend payout ratio is set to come in at around 76% in 2023. That leaves the company with the funds needed to shore up its smoke-free portfolio, fulfill its share buyback program, and reduce debt. That is why I anticipate low- to mid-single-digit annual dividend growth for the foreseeable future, which will build on its 53-year streak of annual payout boosts.
The stock could be a no-brainer buy
For investors who are confident in the company's turnaround plan and aware of its significant share price underperformance in recent years, the stock looks to be greatly undervalued.
Altria Group's forward price-to-earnings (P/E) ratio of 9.2 is well below the tobacco industry average forward P/E of 11.8. This valuation could limit downside risk if the company falls short of its business objectives, or set shareholders up for major total returns if those goals are met.
