Like it or not, investments in "sin" stocks can yield huge gains. Nowhere is that more apparent than with Altria (NYSE:MO)-- formerly Philip Morris -- which has been the best-performing S&P 500 member since all the way back in 1957, averaging annualized growth of over 20% per year.
Numbers like that are almost impossible to come by, and have likely made many shareholders incredibly wealthy. But as good as that news is for yesterday's investors, it doesn't mean much for those who want to put money in the market today.
What does the future look like for Altria and its outsized, 4.2% dividend yield? Read on to find out.
The most important metric for dividend investors to watch
When it comes to dividend payouts, nothing matters as much as free cash flow (FCF). Effectively, this is a measure of how much money a company puts in its pockets during a year, minus anything spent on capital expenditures.
Because Altria only focuses on cigarette sales in the U.S., and has already built out its core infrastructure, capital expenditures are very low. That's great news for investors, as it leaves more money to pay the company's dividend.
Here's what Altria's FCF and dividend payout have looked like since the Great Recession.
Minus a hiccup in 2010 when the company had to make one-time payments to the IRS, Altria has consistently used between 82% and 92% of its FCF to pay its dividend. Usually, this is a huge warning sign for investors as it leaves little wiggle room to continue growing a dividend if the company runs into tough economic times.
But with Altria, investors take a very different approach. Knowing that cigarettes -- as well as beer, wine, and e-cigarettes, all which Altria has a stake in -- are the types of purchases that people make no matter the economic climate, investors are confident that the company can continue increasing free cash flow.
Because of this, instead of being worried about an unsustainable dividend, many on Wall Street choose to view this approach to paying dividends as being extremely shareholder-friendly, as almost all of the company's cash goes right back to investors.
But what does the future look like for Altria?
That being said, just being shareholder-friendly doesn't make a company a good investment. In terms of behaviors, smoking has never been less popular in the United States than it is now.
The number of adult smokers -- as a percentage of the population -- plummeted from over 40% in 1964 to 19% by 2011. Even more remarkable has been the successful campaign against teenage smoking. Just 17 years ago, 36% of teenagers smoked cigarettes. By 2011, that number had been cut in half.
That's a long-term trend that Altria investors should be keenly aware of. But they should also take some solace in the fact that the company has several other lines of business that aren't affected by this trend.
For instance, its smokeless tobacco brands of Copenhagen, Skoal, and Red Seal contributed 12.2% of the company's income last year. Investments in SABMiller and Ste. Michelle Wines Estates also contribute to the company's bottom line, though at a much more moderate 3.3% mark.
But perhaps most important is the company's first e-vapor cigarette, the MarkTen. Technically, sales of the product fall under "smokeless tobacco" along with Copenhagen, Skoal, and Red Seal. But there's no doubt that the popular trend of e-cigarettes are here to stay, and they represent what could end up being the slow death of tobacco in the United States.
Having acknowledged these threats, however, it's definitely worth mentioning that Altria management has proven very effective at forecasting its revenue, earnings, and free cash flow growth -- and increasing its dividend accordingly. If you believe that this trend will continue, and that smoking rates have either plateaued or that other lines of business can pick up the slack, this might be the right dividend stock for you.