If you're on your way to retirement, it may be time to start putting some dividend stocks in your portfolio. They may not have as much upside as high-growth stocks, but reliable dividend payers can provide consistent income for your portfolio with much less risk. As you age, it is not just about growing the pie, but maintaining it. And dividend payers are generally superior to growth stocks in this regard.
Most stocks with dividend yields approaching 10% operate risky businesses and are vulnerable to cutting their dividends over the next few years. Typically you are better off buying dividend payers with lower yields that have the chance to grow their dividend payouts over the next decade. But there is one dividend payer that will not only be able to sustain its 9%+ yield this decade, but has a clear path to growing its dividend per share. Enter Altria Group (MO 1.50%), a misunderstood tobacco giant that is a no-brainer buy for income-seeking investors.
Volume declines, price increases
Altria is the leading tobacco company in the United States with its Marlboro cigarette brand. Marlboro has a greater-than-50% share of the premium cigarette market in the country, shipping 52 billion Marlboro sticks just through the first nine months of this year.
A lot of investors are concerned about Altria's business due to the declining usage of cigarettes in the United States. According to the company's own estimates, adult cigarette usage is declining at a 2.5% annual rate, and has been since 2018. Through the first nine months of this year, shipment volumes declined by close to 10% compared to 2022, indicating that this usage decline may be accelerating.
At first, this looks like a huge red flag for Altria's business. But it is something the company has been dealing with for decades, and counteracted with price increases on packs of Marlboro cigarettes. Despite these consistent price increases, Marlboro has retained its dominant position compared to other cigarette companies in the country due to customer brand loyalty.
Over the last 12 months, Altria's revenue is up 16.4% compared to 10 years ago, which shows the success it has had with these price hikes. Operating income is up even more, showing a 42.4% increase compared to 10 years ago. Lower volumes and the same revenue equals better profit margins, a trend that should continue for Altria this decade.
NYSE: MO
Key Data Points
Preparing for a world without cigarettes
Even though Altria has many years left to raise prices on packs of Marlboros, the company realizes that cigarettes are on the way out in the United States. Alternatives like nicotine vapor and nicotine pouch products are gaining rapid adoption. Altria has exposure to both through its recent Njoy acquisition, as well as its On! nicotine pouch brand.
Within five years, Altria has a goal of reaching $5 billion in annual sales from smokeless nicotine products. That would be around 25% of its trailing revenue today, and should be able to help the company stay relevant if the cigarette business gets much smaller. At a 50% profit margin, that would equate to $2.5 billion in annual earnings. Not bad for a company with a market cap of $73 billion and a cigarette business still gushing cash flow.
MO Free Cash Flow Per Share data by YCharts
Can the dividend keep growing?
At a dividend yield of about 9.5%, Altria is one of the highest-yielding stocks out there. But it still has plenty of room to grow its dividend payout to shareholders over the next decade. Management's own goal is for mid-single-digit growth, which means approximately 5% annual growth.
Altria's annualized dividend rate is currently $3.92 per share after raising it for the 58th time in 54 years. Over the last 12 months, the company generated free cash flow per share of $4.75, which leaves plenty of breathing room to grow the dividend even if it has flat earnings power over the next few years.
The company does have some debt on its balance sheet, but it is manageable, with only around $1 billion or so in bonds coming due every year for the next 10. There should also be no problem refinancing its debt given how profitable the business is.
Another lever Altria can pull -- and has been pulling over the past decade -- is share repurchases. Altria's share count is down 11.3% over the past 10 years as it consistently buys back stock from existing shareholders. At its current share count of 1.77 billion, Altria's nominal dividend payout is just under $7 billion. If it still had 2 billion shares outstanding as it did 10 years ago, that payout would be close to $8 billion. As the company continues to reduce its share count, it will have more breathing room to grow its dividend per share.
Add all this together and I think Altria will have an easy time maintaining and growing its dividend over the next decade. This makes it an easy and low-risk dividend stock to buy for your retirement account.
