Has This Massive Dividend Stock Fallen Off Radars?

Altria has fallen off many investors’ watchlists and with good reason. If any stock falls squarely into the category of sin stock, it’s the maker of Marlboro cigarettes. The tobacco manufacturer has been plagued with competition, regulatory obstacles, and a general trend towards increased wellness.

Imagine selling a product that comes with a government warning encouraging users not to buy it, the odds of success would seem slim. And yet Altria regularly posts $20 billion in revenues and just shy of $9 billion in operating income. This is a cash flow giant that spits out enormous profits annually and rewards loyal shareholders with a near 10% dividend yield.

When payouts get that high, it’s with good cause that investors should be skeptical that they can be maintained, and yet the signs are quite positive for Altria.

Key Points

• Altria has a high dividend yield that appears to be sustainable and significant upside potential.
• Key financial metrics are stellar, suggesting the company is highly efficient and profitable.
• Massive cash flows are unlikely to diminish anytime soon, even if the flagship product is threatened on many fronts.

Buy For the Dividend, Stay for the Upside

With 3-month treasury bills paying around 5% annually, a dividend paying stock really needs to offer a special yield to squeeze out its bond market competition, and Altria does just that with a 9.7% yield.

Usually a yield that high signals something lurks beneath the surface that should be avoided but in the case of Altria it’s not so much a financial goblin under the surface as a product issue. Everyone knows cigarette volumes are on the decline and regulatory pressures, tax hikes, healthcare firms, and general wellness trends are headwinds.

So with the elephant in the room well understood, the financials can be examined at face value and they are highly attractive. Altria won’t win any awards for growth but it is hard to beat when it comes to cash flows which almost hit $3 billion last quarter.

The mountains of cash the company produces supports its continuing increase, now spanning 13 years, of dividend hikes. Furthermore, the payout ratio of around 76% implies it’s still sustainable.

Yet as attractive and reliable as the dividend is, the upside opportunity is even more compelling.

Is Altria a Buy?

If analysts are right, Altria has about 12% upside left to around $46 per share but a cash flows analysis over the next decade suggests it could rise all the way to $66 per share. That would correspond to a gain potential of closer to 60% if realized.

The company has so much to offer value investors that it’s hard to know even where to begin. It has enormous gross margins of around 71%, has demonstrated a consistently improving earnings per share, generates a high return on assets, and has a high shareholder yield.

When you put all those ingredients into the mix, Altria is a highly attractive company in all respects but the obvious one discussed above. And on that front, it’s making strides to diversify revenues away from its flagship cigarette sales to include other more popular options, such as vapes.

All in all, Altria is a compelling value stock for investors over the next year if and when the market shies away from growth stock and more towards value stocks.