One of the most enduring debates in investing is whether to favor growth or value stocks. Growth stocks have enjoyed a long period of outperformance since the global financial crisis of 2008, but value stocks have historically delivered higher returns over the long run.
A subset of value stocks that deserves special attention is dividend stocks, which offer investors a steady income stream and a potential hedge against market volatility. One of the most popular dividend stocks is U.S. tobacco giant Altria (MO -0.37%).
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Altria stock boasts a monstrous dividend yield, and its shares trade at a significant discount compared to the broader market (more on these features below). It may also be home to an underappreciated long-term value driver.
Is Altria stock a buy? Let's take a closer look to find out.
Altria: A major tobacco company with a mouthwatering 9.7% yield
Altria is a dominant force in the U.S. tobacco industry, which presents both opportunities and challenges for investors. On the positive side, Altria has a solid grip on the premium cigarette segment, where it can use its pricing power to mitigate the falling demand. On the negative side, the U.S. market is experiencing one of the steepest declines in smoking rates in the world.
This tough situation is the main factor behind Altria's stock trading at a meager 8 times projected earnings. For comparison, the benchmark S&P 500 index trades at a forward-looking price-to-earnings ratio of 20 at the time of this writing, indicating that Altria's stock is substantially undervalued relative to the broader market.
In addition to its bargain valuation, Altria also boasts a tantalizing 9.7% dividend yield, a long history of dividend hikes, and a 10-year dividend growth rate of 8.33%.
However, the company's payout ratio of 84% is on the high side, and its near-term revenue growth prospects are dismal. Analysts forecast that the ongoing trend of lower smoking rates in the U.S. will result in Altria's revenue increasing by less than 1% in both 2024 and 2025.
While the tobacco giant is diversifying into new product categories like heated tobacco and oral nicotine pouches that hold enormous commercial potential, it has also faced major hurdles with some of its past growth initiatives. So there's no assurance that Altria will be able to reverse the tide anytime soon.
The big picture
Despite these headwinds, Altria should be able to generate positive returns for shareholders over the next 10 to 20 years due to its dominant position in the premium cigarette category, its expansion in less harmful alternatives, and its monstrous yield. After all, the company is aware of the problems plaguing its core business, and it is taking active measures to address them.
Although these efforts may take years to fully alter the perception around Altria's stock, management has demonstrated their dedication toward paying a stellar dividend yield, and the company possesses a tremendous amount of untapped potential -- especially in the realm of cannabis.
Cannabis is a distant value driver due to the U.S. federal government's restrictive stance on the plant, and Altria has already had difficulties leveraging its vast network in this area in the recent past. But analysts think the U.S. cannabis market will eventually be worth over $100 billion at its peak.
Altria has the expertise, the commercial infrastructure, and the financial resources necessary to quickly build out a dominant position in this space once federal prohibition comes to an end. So, if you're a truly long-term investor, Altria stock may be worth buying for both its outsized yield and its potential as a disrupter in the U.S. cannabis market way down the road.
