Bob Ciura, contributing editor to Sure Dividend, continues his countdown of favorite Dividend Kings — a highly select group of just 35 stocks that have raised dividend for at least 50 consecutive years.

Income investors looking for great stocks to own have many choices. One place we like to start is with the Dividend Kings. This group of companies has stood the test of time in terms of dividend excellence, but not all are created equal.

Read Part 1 of this special report here

Altria Group (MO) manufactures and sells cigarettes, oral tobacco products, and more. Altria owns the rights to the Marlboro brand in the US, as well as other popular brands such as Black & Mild, Copenhagen, Skoal, and more.

Altria has a truly outstanding dividend increase streak of 52 years as it enjoys relatively stable demand irrespective of economic conditions. In this article, we’ll take a look at Altria’s prospects, and why we believe it is a top choice among the Dividend Kings.

Business Overview & Recent Events

Altria faces an ever-present headwind for its core tobacco products, in that smoking demand has waned for decades in the US. There are still tens of millions of smokers in the US, but both the number of smokers, and the number of cigarettes those smokers use on average continues to decline. However, Altria has managed to grow its earnings-per-share by just over 10% annually for the past decade, a very impressive feat given the industry backdrop.

Altria has managed to grow some by reducing its share count via repurchases, which has seen the share count decline by about 1% annually. But most of the company’s earnings-per-share gains have accrued from its ability to raise prices, which it has done very consistently for years.

Its Marlboro brand — among others — gives it a competitive advantage in the marketplace, and Altria has taken full advantage of this over the years, more than offsetting declining demand by charging more for its products, and generating earnings growth in the process.

We expect to see just over 2% annual earnings-per-share growth in the years to come, but not in the way Altria has grown earnings in the past. It is on a years-long journey to eventually stop selling smoking products entirely, which means it must replace that lost demand with other products.

It has spent billions of dollars investing in Cronos Group (CRON), as well as a stake in vaping company Juul Labs. Those investments have destroyed shareholder capital thus far, with the company taking massive write downs against those positions.

The company also sells nicotine pouches, and has a sizable investment in alcoholic beverage maker AB-Inbev (BUD). Its various investments in other products and different companies fits within Altria’s 2030 vision to transition smokers toward smokeless alternatives. We believe it has the potential to see modest growth as it goes through this long transition.

Competitive Advantages & Growth Prospects

Altria’s characteristics as an income stock are nearly unparalleled, given its 52-year dividend increase streak, but also its enormous dividend yield. The stock yields 7.5% today, which is about six times that of the S&P 500. Altria’s ability to generate income for shareholders is on par or better than most REITs or BDCs, which are vehicles that exist essentially to return capital to shareholders. Certainly, this yield is a big reason why we like Altria.

Dividend growth has averaged 8.6% in the past decade as well, so it isn’t like Altria has rested on its laurels in terms of dividend increases. Oftentimes we see stocks with decades-long dividend increase streaks struggle to raise their payouts at meaningful rates, but there is no such issue with Altria.

We see much lower dividend increases ahead at this point given the huge transition the company is undertaking at the moment, but we also see the dividend as continuing its rise over time.

The payout ratio is elevated at 78% for this year, but given the company’s highly predictable revenue and earnings profile, we see the current payout as safe. Altria enjoys exemplary recession resistance as well given tobacco usage holds up very nicely, irrespective of economic conditions.

Valuation & Expected Returns

Despite a modest growth outlook, we see Altria’s future as bright when it comes to total shareholder returns. We see 2.2% earnings-per-share growth driving not only earnings, but the dividend higher over time; we expect matching 2.2% growth in the per-share payout.

The current price-to-earnings multiple is 10.3, and our estimate of fair value is 11 times earnings. That implies a small tailwind to total returns of just over 1% annually.

But the biggest component of total returns is easily the dividend, which is currently yielding 7.5%. Altria has always had a very large dividend yield, owed to its 50+ years of increases, but also the fact that management allocates most of its excess capital to the dividend, rather than things like acquisitions, debt reduction, or share repurchases.

In total, when taking into account the 2.2% earnings growth, slight tailwind from what could be a rising valuation, and the 7.5% dividend yield, we see Altria’s total returns at a projected 9.8% annually over the next five years.

Final Thoughts

Altria is going through a period of intense transition as it attempts to move current smokers off of cigars and cigarettes, and into other products such as legalized marijuana, vaping, heated tobacco, and others. This will cause the company’s lucrative current revenue base of habitual smokers to leave its current brands, and while this transition is still uncertain, we see Altria as having ample time and cash to make the transition.

Growth is likely to be much lower in the coming years than it has been in the past, and that is likely to slow down dividend growth as well. But given the company’s very strong dividend yield, as well as a safe payout that should stand up to any economic condition, we still see Altria’s total return prospects as very strong among the Dividend Kings. We rate the stock a buy as a result.

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