Altria (MO -0.37%) stock is, in some ways, one of the more resilient stocks trading on the market. Despite the surgeon general turning against its primary product in 1964, the stock has continued to rise even as smoking declined in the U.S.
Today, the stock is an integral part of numerous stock portfolios and remains on the watchlists of other investors. These current and prospective investors need to remember three things before adding positions to this tobacco stock.
1. Many avoid the stock for ethical reasons
As almost everyone knows, Altria's main source of revenue is tobacco sales. As studies have established, its product is linked to numerous health problems, many of which lead to permanent bodily damage and sometimes death.
Consequently, many investors want nothing to do with such a stock. Others are willing to ignore that fact. Wherever one stands, it forces investors to ask themselves hard questions.
It also serves as a reminder that investments are personal decisions. Ultimately, one should buy stocks that allow them to sleep at night. If Altria's business does not allow an individual investor to rest easy, that person should avoid this stock, regardless of all other factors.
2. It is probably only suitable for income investors
But for investors who do not have such objections, one cannot deny that Altria has served as one of the more lucrative income stocks. Its current annual dividend of $3.76 per share offers a dividend yield of about 8.3%. This is more than five times the S&P 500 average yield of 1.5%. It also beats the current 5% inflation rate and the 5%+ interest rates some banks offer on CDs.
Additionally, the company has raised its payout every year since 2009. Also, in 2008, what looks like a dividend cut was a payout in shares of the company it had spun off, Philip Morris International. This shows that shareholders benefited even when payouts technically fall.
However, Altria's stock price growth over the last five years amounted to only a fraction of the S&P 500. This likely means one should avoid it unless one's goal is income.
3. The Juul settlement is unlikely to derail the stock
Also, one long-standing concern involves the aforementioned health costs. The latest occurred in April when Altria company settled with six states regarding the health effects of its e-cigarette product, Juul. In that settlement, the company paid $462 million.
Admittedly, Altria stock has done little this year, and the settlement seems to have a negative near-term effect on the stock. But while that settlement may seem like a massive cost, it pales in comparison to the agreement in 1998 to settle claims over the health costs of smoking. This cost $206 billion over the first 25 years, with payments made into perpetuity. The agreement involved four major manufacturers, which included Altria.
Nonetheless, since the announcement of that settlement, the stock has benefited from a total return (which includes dividends) of more than 6,300%, dramatically outperforming the S&P 500. That indicates that from a financial standpoint, the Juul settlement will probably not derail the stock long-term.
MO Total Return Level data by YCharts.
Making sense of Altria stock
Ultimately, only income investors who do not object to tobacco stocks should buy Altria stock. While it pays a generous dividend, some investors may object to the nature of Altria's product. This should serve as a reminder that investment choices are personal decisions, and income investors should consider their individual values before buying this stock.
Nonetheless, if looking for income, smoking is unlikely to go away, and the company has a long history of prospering amid massive settlement costs. Thus, it should continue to serve dividend investors well.
