Investors Love Altria’s 10% Yield Dividend: Is There More Hope for 2024?

Tobacco stocks are a controversial niche in the investment community. But regardless of your stance on them, cigarette manufacturers are famous for paying out hefty dividends. Altria Group (Missouri 0.40%) Over the past 54 years, it has raised its dividend 58 times and has generated a whopping 10% return at current stock prices.

But dividends aren’t everything. The stock is down nearly 50% from its 2017 high. Will investors finally get something positive other than dividends from Altria in 2024? To do so, several fundamental problems must be overcome.

The golden goose is getting older

Most articles you read about Altria, or any tobacco product, emphasize the next generation of nicotine products, such as oral pouches or e-cigarettes. While these are certainly important (and increasingly so), the long-established tobacco business is still what pays the dividends that Altria distributes to shareholders every few months.

In the first nine months of 2023, smokable products (primarily cigarettes) accounted for $16.5 billion (approximately 89%) of Altria’s total sales of $18.5 billion. Additionally, the company derives approximately 86% of its operating profit from smokable products. It’s clear that Altria still relies heavily on its tobacco business.

As most people know, smoking is harmful to your health, and the number of Americans who smoke is decreasing almost every year. Altria’s cigarette sales declined 10.5% year-over-year through the first nine months of 2023. Altria has been raising prices for years to offset lower cigarette sales. That’s why its free cash flow and gross margin have grown more than its revenue over the past decade.

MO Revenue (TTM) data from YCharts.

But of course it becomes more difficult to make up the difference in fewer and fewer units. This wouldn’t be such a big deal if Altria also grows its new business. But I tried it and it failed. It spent $12.8 billion to purchase a stake in Juul. The investment blew up in Altria’s face and lost $12.5 billion in value after regulators cracked down on Juul’s unethical marketing practices.

Altria’s growth prospects have darkened

The lack of new growth catalysts has slowly weakened analysts’ outlook for Altria. Over the past eight years, projected annual earnings growth rates have moved from high single-digit percentages to low single-digit percentages.

It is important to note that profits are expected to grow more slowly. However, investors who are concerned about Altria’s dividend can rest assured. The dividend payout ratio is manageable at around 80%, and earnings growth will help management sustain small dividend increases.

MO EPS LT Growth estimates data with YCharts.

However, Altria’s lack of progress in the non-tobacco sector weighed on its stock price. The company is increasing sales of some of its next-generation products, such as On! Nicotine pouch. Acquired a competitor to acquire electronic cigarette products. But Altria has dragged its feet for years, as evidenced by its still alarming level of tobacco dependence.

Will Altria be bought in 2024?

Without a game-changing new revenue stream, it’s hard to see much upside for Altria stock in 2024. Even if it trades at a forward price-to-earnings (P/E) ratio of just 8, its value isn’t much. Note that the price/growth (PEG) ratio is above 2. (Stocks with a PEG ratio of 1 are considered fairly valued, while a ratio below 1 indicates a cheap stock.) Slower growth has offset the decline in value. . The tobacco business still carries nearly all of Altria’s water, and that won’t change overnight.

Of course, there is also the possibility of a game-changer. Altria owns 10% of the beer giant. Anheuser-Busch InBev. If the company were to cash out that stake, which is currently worth $12.8 billion, it would free up enough money for management to take dramatic steps like an acquisition. But nonetheless, shareholders will be hoping for a better outcome than their Juul investment.

Altria is a solid dividend stock. Of course, unless there are notable changes in the business, the stock’s value has fallen enough that it should have a higher bottom than it did a few years ago, even if there isn’t a ton of upside ahead. Don’t be shy about receiving huge dividends. But those more interested in total return on investment should probably avoid this.