Despite tobacco use being in a steady decline in recent decades, companies like Altria Group (MO) have used combustibles as their cash cow to fuel investments into growth segments — while growing their dividends and repurchasing their discounted shares, explains Rida Morwa, editor of High Dividend Opportunities.

In the past five years, MO has paid over $30 billion in dividends and purchased shares worth $6 billion. MO recently made a 4.3% raise to its quarterly dividend, and its annualized dividend rate of $3.92/share represents a 9.2% yield. MO’s recent dividend raise marks the 54th year of annual payment increases, a feat very few companies can boast.

Along with growing dividends, MO has been repurchasing its cheaply valued shares. The company repurchased $260 million worth of shares during Q3, bringing their YTD 2023 total repurchases to $732 million. MO has another $268 million available in its share repurchase program and intends to utilize it by December 31.

In recent years, MO has been investing heavily in non-combustibles, such as On! (a tobacco leaf-free nicotine pouch); SWIC (a heated tobacco product that uses tobacco-filled capsules); Ploom (heated tobacco sticks); and NJOY (an e-vapor product).

Altria’s $2.75 billion all-cash acquisition of NJOY in July is already bearing results after a full quarter of ownership. NJOY ACE is the only pod-based e-vapor product with FDA approval for marketing, and MO grew its distribution to ~42,000 stores, including all the top 25 convenience store chains by e-vapor sales volumes.

For FY 2023, MO has narrowed its adjusted diluted EPS guidance to be between $4.91 and $4.98 (a 1.5% to 3% YoY growth), providing 126% coverage to the dividend.

The company maintains a modest debt profile, with a debt-to-EBITDA of 2.1x at the end of Q2. The company’s balance sheet carries investment-grade ‘BBB’ ratings, with adequate liquidity to propel its “Moving Beyond Smoking” strategy.

MO’s enterprise goals for 2028 outline an OCI (Operating Companies Income) margin of 60% or higher in the next five years. This would continue to produce the cash flows needed for expansion and market penetration in non-combustibles.

Big Tobacco, akin to a resilient cockroach, not only endures the challenges of social stigma, regulatory fines, penalties, and headaches but remarkably thrives, consistently returning with highly sought-after products. MO trades at a dirt-cheap valuation compared to peers, making it an excellent bargain for long-term income investors.

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