Shareholders in tobacco company Altria Group (MO -0.37%) recently got paid their quarterly dividend of $0.98 per share. Altria's been putting money in investors' pockets for decades, and the stock's 9.2% yield is still impressive despite climbing Treasury bond yields.
High dividend yields sometimes signal danger in the underlying company, so should investors be wary of Altria? Smoking is a dying habit, a fact most know well. Still, profits keep climbing, and the dividend keeps going up.
So, should investors buy, sell, or hold Altria stock? Here is what you need to know.
Isn't smoking declining?
Altria is a tobacco and nicotine products company, but cigarettes remain its core business. Combustible products comprise roughly 88% of Altria's total sales (net excise taxes). Just like one might guess, with a dying industry, Altria is slowly selling fewer cigarettes over time. The company has shipped 10% fewer cigarettes through six months of 2023 versus 2022.
But tobacco's pricing power is its ace in the hole. The addictive nature of its product lets it slowly raise prices to offset volume declines. This trend is still intact; Altria's smokeable product operating profits are 1.7% higher than last year's through two quarters.
This slow and steady price game has helped Altria grow revenue and operating profits over time.
MO Revenue (TTM) data by YCharts
There are reasons this might not go on forever (more on that shortly), but it's allowed Altria to continue paying and raising its dividend.
Is Altria's mighty dividend safe?
It's probably a safe assumption that most investors own Altria stock for the dividend. It has a 9.2% dividend yield at today's share price. Capital gains have been sparse; Altria's share price is only up 25% over the past decade and down 30% over the past five years. The company's failed Juul investment has something to do with that.
But income-hungry investors could keep eating well moving forward. The company's dividend payout ratio is manageable at 78% of its cash profits. Meanwhile, analysts believe the company can keep growing its earnings by 4% to 5% annually, riding the pricing game tobacco companies are known for.
MO Cash Dividend Payout Ratio data by YCharts
If that wasn't enough, Altria owns a 10% stake in beer conglomerate Anheuser-Busch InBev that it could sell at any time. That stake is worth $10.3 billion, enough cash to clear over a third of its total debt. One might say that Altria's dividend is solidly safe for at least the next five years, an excellent sign for dividend-focused investors.
Things get tricky over the long term for Altria
Altria's limited U.S. competition has helped it slow-play its declining cigarette business for years, but that could change as its spin-off (and now) rival company, Philip Morris International (PM -1.11%), enters the U.S. market with select products. Philip Morris International recently acquired Zyn-maker Swedish Match, which pits it against Altria's efforts to diversify its business with On! nicotine pouches. It's also (slowly) bringing heat-not-burn device IQOS to the U.S. in 2024, which aims to convert cigarette smokers.
IQOS has a proven ability to take market share in cigarette markets, which could become an eventual threat as Philip Morris International gets IQOS up and running. Investors will need to see Altria successfully grow its non-cigarette businesses, or its dividend could eventually get in trouble.
Buy, sell, or hold Altria stock?
How you approach an Altria investment depends, in part, on your time horizon. Investors who want a dependable, high yield and are only looking a few years ahead might be interested in the stock. Altria trades at a 2.3 price/earnings-to-growth (PEG) ratio, which signals the stock isn't cheap for the expected growth you get. However, the 9.2% yield is a high floor to start with.
If your time horizon is longer, there might be better options than Altria. The dividend is excellent, but you're not getting much growth at this point. Additionally, the looming threat of competition in some markets from Philip Morris International could affect Wall Street's sentiment toward Altria if IQOS makes quick progress when it launches next year.
