Everybody can probably agree that living expenses are seemingly relentless. No matter what is going on in the world, receiving goods and/or services means you are going to eventually have to pay for them.
Dividend stocks can help investors cover these unrelenting living expenses because they provide regular dividend payments. This is a big reason why dividend stocks maintain significant interest from investors and why they tend to hold on to them for years.
Having raised its dividend annually for 53 years straight, Altria Group (MO -0.37%) is in the company of Dividend Kings -- a group of companies that have boosted their dividends for 50 or more consecutive years. But does the company's sterling dividend-growth track record justify a buy rating for income investors?
Let's check into Altria Group's fundamentals and valuation to see if an answer presents itself.
Altria is flexing its pricing power
For countless decades, Altria has sat atop the U.S. tobacco market. The company's industry dominance can be attributed to owning the most popular cigarette brand in the world, Marlboro, as well as the leading tipped cigar brand Black & Mild.
Altria Group's revenue net of excise taxes increased by 1.2% over the year-ago period to $5.4 billion in the second quarter (concluded June 30). These results were due to strength in both segments throughout the quarter.
Altria Group's revenue net of excise taxes in the smokeable-products segment (e.g., Marlboro) settled 0.9% higher year over year for Q2 to $4.8 billion. Price hikes were able to more than offset the 7.5% year-over-year decline in U.S. cigarette shipment volumes (adjusting for trade-inventory movements). Higher prices in the oral tobacco-products segment (i.e., Copenhagen smokeless tobacco and on! oral nicotine pouches) countered a 2.5% year-over-year shipment-volume decline during the quarter, including trade-inventory movements and calendar differences. This helped to push Altria Group's oral tobacco-products segment revenue net of excise taxes 2.8% higher over the year-ago period to $651 million during the quarter.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Net margin | 42.5% | 43.1% |
| Diluted shares outstanding | 1.81 billion | 1.78 billion |
Data source: Altria Group.
Altria Group posted $1.31 in non-GAAP (adjusted) diluted earnings per share (EPS) in Q2, which was up 4% over the prior-year quarter. A higher revenue net of excise taxes base and lower operating expenses caused a 60-basis point expansion in the company's non-GAAP net margin for the quarter. Coupled with the share-buyback program that reduced its share count, this is how Altria Group's adjusted diluted EPS growth surpassed revenue net of excise taxes growth during the quarter.
The company hasn't had the best results in trying to diversify away from its core business of cigarettes. Disastrous Juul and Cronos Group acquisitions aside, the good news is that Altria Group's fortunes have been improving lately. The company recently completed a $2.7 billion deal for NJOY Holdings. If Altria Group can leverage influence to get the NJOY ACE e-vapor product into 70,000 U.S. retail stores as management expects in the next few years, the deal could be a winner. The company expects that it could turn a profit from the acquisition by 2026.
Thanks to Altria Group's pricing power and recent dealmaking, analysts forecast the company will deliver 3.6% annual adjusted diluted EPS growth through the next five years.
Image source: Getty Images.
A safe, market-obliterating payout
Investors who are most concerned with generating income will love Altria Group for its 8.7% dividend yield, which is leagues more than the 1.6% yield of the S&P 500 index. And for such a mountainous yield, it isn't the yield trap that you'd expect.
Altria Group's dividend payout ratio is set to clock in at roughly 76% in 2023. This allows the tobacco company to retain the capital needed for debt repayment, future deals, and share buybacks. That is why 3% to 4% annual-dividend growth for the foreseeable future is a reasonable expectation in my opinion.
The stock is priced at a giveaway valuation
For investors who are confident that Altria Group can keep implementing successful price hikes as it reorients its business around newer products, the stock looks attractive. Altria Group's forward price-to-earnings (P/E) ratio of 8.3 is much cheaper than the tobacco industry's average forward P/E ratio of 14.8. The stock could be a buy for income investors factoring in the lowly valuation. Of course, Altria Group's fundamentals will have to be closely monitored over the next two-to-three years as the turnaround is executed to secure growth for the long run.
