Finding reliable sources of passive income can be challenging in today’s volatile markets. But one exceptionally safe, high-yielding stock flying under the radar right now is domestic tobacco giant Altria Group (MO).
This iconic brand has all the hallmarks of a low-risk income investment. With rock-solid fundamentals and over 50 consecutive years of dividend growth, Altria offers investors a straightforward path to $500 in extra cash flow next year.
The King of Dividend Stocks
Altria boasts an incredible 58 dividend increases in the past 54 years. This rare show of consistency places Altria among the Dividend Kings – a small group of less than 30 S&P 500 stocks with 50+ years of rising payouts.
Impressively, Altria has delivered a 17% annualized total return over the past 20 years. That’s higher than the S&P 500’s comparable return of around 9% over the same period.
But does Altria still represent a smart income investment today amid evolving consumer behaviors and regulations? Or is its best growth in the rearview mirror?
Why Altria Can Overcome a Shrinking Smoker Base
There’s no doubt the U.S. tobacco industry faces long-term volume declines. The percentage of adult smokers has plunged from 42% in the mid-1960s to just 11.5% in 2021, per CDC data. This shrinkage primarily reflects growing health concerns around long-term tobacco use.
Normally, a steadily declining user base would raise red flags. But Altria possesses two key competitive advantages that enable reliable earnings despite lower cigarette volumes.
Sky-High Pricing Power
First, Altria holds tremendous pricing power in the tobacco industry. Because cigarettes contain the addictive chemical nicotine, the company can raise prices without triggering significant user defections.
Case in point: Marlboro, Altria’s premium flagship cigarette brand, commanded a mammoth 42.6% retail share as of September 2023. This level of market dominance supports Altria’s pricing strategy.
So even as cigarette shipment volumes decrease, Altria can offset declines by boosting prices per pack. Since tobacco is an inelastic good with a stable customer base, this pricing power should persist.
Diversification into Smokeless Products
Secondly, Altria is expanding its business mix beyond traditional smokable products like cigarettes.
Most notably, the company acquired leading e-vapor company NJOY in a $2.75 billion deal that closed in early June 2022. Unlike most vape manufacturers, NJOY has received FDA marketing granted orders (MGOs) for its products.
This key regulatory approval helps cement NJOY’s long-term market position. And it allows Altria to immediately capitalize on the fast-growing e-vapor category’s upside in a compliant way.
Between its world-class cigarette brand and diversification into smokeless, Altria is strategically positioned to overcome volume declines in its core US cigarette division.
Low Valuation Makes Altria a Value and Income Play
In addition to its defensive characteristics, Altria offers investors value at today’s prices.
Shares currently trade at just 8 times forward earnings estimates. This discounted multiple reflects concerns around smoking rates and regulatory pressures.
However, Altria retains its renowned pricing power and now has carefully selected new growth verticals like e-vapor. Factoring in consistent share repurchases, the company’s earnings per share should still grow at a low-to-mid single-digit annual rate moving forward.
With a secure payout backed by rising earnings, Altria is poised to continue its Dividend King streak for years to come. Based on the stock’s 4.95% dividend yield, a $10,000 investment in Altria would generate around $500 in dividend income over the next year.
For investors seeking passive income along with an attractive value proposition, Altria fits the bill on both fronts. While seldom viewed as a exciting stock, its impressive dividend track record and discounted cash flows make Altria a compelling investment today.