The best dividend stocks combine high payouts with long-term dividend growth. On those metrics, it's hard to find a stock with a better track record than tobacco giant Altria Group (NYSE:MO), which sports decades of consistent dividend increases and a current yield of 4.5%. After having survived the ongoing threat of tobacco litigation, Altria now must deal with enhanced regulatory efforts to limit its revenue and deter potential customers from using its products. Yet even as rivals Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO) look to combine forces against it, Altria has several things going for it as a dividend stock in the years to come. Let's look at three reasons why Altria should sustain its value for investors as a top dividend stock.
1. Altria has the pricing power to offset volume declines.
For years, critics have pointed to the declining number of smokers in the U.S. as a reason not to invest in Altria and its tobacco-producing peers. But in focusing only on sales volume, bearish investors ignore the other part of the revenue equation: how much companies can charge for their products. Pricing is where the power of a tobacco company's marketing and brand awareness comes in, and Altria has an enviable track record of keeping its customers loyal.
Altria brand leader Marlboro had a 44% market share as of mid-2014, giving it a dominant position in the U.S. cigarette market. As a result of its high-profile brand, Altria was able to boost prices on Marlboros enough to turn a nearly 5% year-over-year drop in volume in the second quarter of 2014 into a total dollar-revenue decline of less than 1%. That's particularly impressive given the high levels of tobacco taxes that smokers already pay, which should arguably give Altria even less room to make price increases without crushing demand. Nevertheless, Marlboro has shown that smokers still prefer premium brands even as prices rise, and that loyalty is a key asset for Altria's future.
2. Altria is looking at growth in electronic cigarettes and vapor products.
With the declines in traditional tobacco volumes, Altria has looked for other ways to bolster growth. One hot area is in e-cigarette and vapor products, where Altria and other industry players hope to find greater acceptance and looser regulation than in regular cigarettes. Altria has moved forward aggressively with its MarkTen e-cigarette line, making it available in tens of thousands of retail locations. Moreover, with its purchase of Green Smoke in April, the company has demonstrated an even deeper commitment to vapor products and their growth potential.
Altria won't have free rein over the tobacco-alternative space, as Lorillard has been quite aggressive with its blu eCigs line. But with Reynolds planning to divest blu as part of its Lorillard acquisition in favor of its own Vuse brand, Altria has an opportunity to push development of MarkTen and Green Smoke more strongly in order to capitalize on any confusion stemming from the Reynolds-Lorillard merger.
3. Altria's beer and wine businesses offer the opportunity for profit-enhancing opportunities beyond tobacco.
Despite the popularity of e-cigarettes, some fear the FDA and other regulators will eventually clamp down on these products as much as they do regular tobacco products. But Altria has exposure completely outside the tobacco arena that should give nervous dividend investors some reassurances about its survival prospects.
Specifically, Altria's Ste. Michelle Wine Estate division is a wholly owned subsidiary that produces well-known brands like Columbia Crest and Chateau Ste. Michelle. While the unit produces just 2.5% of Altria's revenue, that figure has jumped by 50% over the past four years.
Even more important is Altria's 27% stake in SABMiller, which produces beer brands including Miller and Foster's. With that stake producing nearly $1 billion in profit last year, SABMiller is a key producer of the earnings that shareholders count on to give Altria the ability to keep its dividends climbing higher over the long run.
The tobacco industry's challenges make it tough for some investors to count on Altria's ability to remain a top dividend stock. Yet after handling so many other threats to its business model, Altria appears to be taking the necessary steps to preserve its dividend for years to come.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.