The good times have come back to Wall Street! The broader market has enjoyed a solid first half of 2023 after suffering brutal volatility last year. But many stocks are getting a bit pricey after months of rallying.
However, there is always an opportunity somewhere. That brings us to the tobacco stock Altria Group (MO -1.94%). The stigma around cigarettes turns off investors enough as it is. Altria's share price hasn't yet bounced back from its disastrous Juul investment in 2018 that essentially blew up into nothing.
But Altria isn't the fatally wounded animal the market is treating it as. Instead, Altria is still growing. This imbalance makes the stock a bargain that dividend-hungry investors should consider scooping up while it's cheap.
The dividend establishes a high floor
Altria, the company that owns and sells Marlboro cigarettes in the United States and a handful of other tobacco and nicotine products, isn't a very volatile stock. It sports a beta of just 0.59, meaning that its share price typically responds less to the broader market's ups and downs. It's a steady Eddie.
That can appeal to certain investors like retirees, who want to live out their golden years without the stress of seeing their investments swing by massive amounts. Altria may not be very exciting, but most investors don't own the stock for excitement -- they hold it for its large dividend. Altria is a Dividend King that has paid and raised dividends for decades. Additionally, Altria's cash flow covers the dividend sufficiently with a payout ratio just above 80%, which isn't a big deal since the tobacco business requires almost no capital investments.
Investors can enjoy an 8.5% dividend yield at the current share price, which gives investors a pretty high floor considering the stock's low volatility. It may not take you from rags to riches overnight, but Altria is an excellent choice for conservative investors looking for passive income.
A valuation that leaves room for upside
Fewer people have smoked fewer cigarettes in the decades since the mid-1960s, when the Surgeon General first took a hard stance against smoking. A common misconception is that due to declining smoking rates, Altria's slowly faded into the abyss as its customers quit (or worse).
But as you can see below, Altria's operating profits have climbed steadily as the company raises its prices enough to offset the decline in cigarette volumes and eke out growth. Altria is anything but a growth stock, but it's also a business doing far better than getting by.
MO Operating Income (TTM) data by YCharts
Management is guiding for 2023 earnings per share (EPS) of roughly $5, valuing the stock at a price-to-earnings ratio (P/E) of just nine.
Additionally, Altria is striving for mid-single-digit EPS growth through 2028, so the company's profits and dividend should continue steadily marching higher. That gives investors total returns of 12% to 13%, without factoring in the potential upside if Wall Street rerates the stock to a higher valuation -- a modestly higher P/E can quickly turn 12% to 13% annual returns into 16% to 17%.
What might get the market excited about Altria again?
Most see Altria as nothing more than a dull cigarette stock because the company still counts on cigarettes for most of its profits. However, there is change bubbling under the surface. The company broke its agreement with Philip Morris International for IQOS and used the $2.7 billion breakup fee to buy Njoy, a U.S. Food and Drug Administration-authorized electronic cigarette brand. Altria is pushing into non-combustible nicotine products over the coming years, which could set the company up for a more stable future.
Additionally, Altria owns 10% of Anheuser-Busch InBev (BUD -0.71%). Today that stake is worth roughly $11 billion, or about 13% of Altria's market cap. Management could liquidate that stake at any time and use the money in several ways, from buying or acquiring new businesses and products to repurchasing a tremendous number of shares that would significantly increase Altria's EPS.
Investors can buy Altria for its huge dividend, steady growth, and several options to fuel growth over the coming years. The stock's stigma on Wall Street offers investors a deal worth considering while the getting is good.
