Dividend stocks provide a certain level of safety in a volatile market. And tobacco giant Altria Group (MO) has long been a favorite among income-seeking investors, with its consistent dividend hikes and ultra-high yield. Altria is one of the world's largest and most recognized tobacco companies. It pays an attractive annualized forward dividend yield of 7.6%, significantly higher than the consumer staples sector average yield of 1.9%.
Tobacco is an addictive and recession-proof product, which is why Altria has been able to increase its earnings and continues to pay dividends. However, investors have been skeptical of Altria's ability to maintain dividend payments. The decline in tobacco sales, as well as the industry's overall challenges, continue to haunt the tobacco giant.
Altria recently increased its dividend, assuring shareholders of its ability to maintain payouts. Let's see if the stock is currently a buy.
Altria’s Growth Story
Altria has a long history of producing and selling cigarettes, tobacco products, and related accessories, making it a major player in the industry.
However, in recent years, Altria has faced several significant challenges, the most notable of which is a decline in cigarette consumption in the United States. For decades, smoking rates have steadily declined due to increased health awareness, regulatory restrictions, and the growing popularity of alternatives, such as vaping and smokeless tobacco. This poses a direct threat to Altria's core business, which relies heavily on cigarette sales for a significant portion of its revenue.
Altria's stock has also experienced some declines, owing primarily to these concerns. However, things are starting to look better for the stock, despite lingering headwinds.
Valued at $92.35 billion, Altria stock has gained 34.3% YTD, outperforming the S&P 500 Index’s ($SPX) gain of 15.6%.
Altria’s Strategic Initiatives Might Save Its Dividends
To address these challenges, Altria has been diversifying its product portfolio. It bought a significant stake in JUUL Labs, the leading e-cigarette company in the U.S. However, this investment has encountered difficulties, including legal challenges and regulatory scrutiny, resulting in significant write-downs.
Furthermore, as part of its long-term strategy, Altria has also stepped into the evolving cannabis industry, acquiring a 45% stake in Canadian cannabis company Cronos Group (CRON). Due to challenges in the cannabis industry, this investment has not yielded significant profits. However, the cannabis industry is still in its infant stages, and could boom in the coming years, particularly with the prospect of rescheduling and potential federal legalization in the U.S.
In Altria's most recent second quarter, domestic cigarette shipment volume declined by 13% year-over-year (YoY), resulting in a 5.6% dip in smokeable products revenue. Total net revenues fell 4.6% YoY to $6.2 billion, while adjusted earnings per share (EPS) remained unchanged from the prior-year quarter, at $1.31. Nonetheless, Altria distributed $1.7 billion in dividends in Q2.
Its forward payout ratio of 76.9% is high, which raises concerns among investors about whether the payouts can be sustained, given the earnings growth. However, Altria recently increased its quarterly dividend by 4.1%, to $1.02 per share. This was the company's 59th dividend increase. Altria has earned the title of a Dividend King, which refers to companies that have raised dividends consistently for at least 50 consecutive years.
Despite investor skepticism, Altria committed to increase dividends by mid-single digits per year until 2028. This comes after the company announced in the second quarter that future dividend payments will be subject to board approval.
For the full year, the company anticipates EPS growth of 2.5% to 4%, depending on macroeconomic conditions in the second half of the year. Analysts expect EPS to rise by 3.08% in 2024, and then another 3.9% in 2025.
What Does Wall Street Say About Altria Stock?
Overall, on Wall Street, Altria stock is a “hold.” Recently, Stifel analyst Matthew Smith, CFA, reiterated his “buy” rating for Altria stock. Furthermore, even the stock's biggest critic, UBS analyst Faham Baig, increased the target price for MO from $36 to a new Street-low of $39 - which Altria has already surpassed - while maintaining a “sell” rating.
Four of the 11 analysts who cover MO rate it a "strong buy," five rate it a "hold," and two recommend a "strong sell."
Altria stock has surpassed its average price target of $48.83. However, its high target price of $57 indicates that the stock could rise by 5.4% from current levels.
The Bottom Line
Overall, Altria remains a reliable dividend stock with a strong legacy. However, it faces significant challenges as the world transitions away from traditional tobacco products.
Altria's future as a dividend stock will be determined by its ability to navigate the ongoing decline in cigarette consumption while successfully expanding its other product portfolio. Investors considering buying Altria stock should weigh the attractive dividend against the potential risks and uncertainties in the tobacco industry. For now, I agree with Wall Street that the stock is a “hold.”
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
