Altria: Rising Yield, Rising Stock

12/02/2013 7:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

When we first recommended the parent company of Marlboro's cigarettes in 2011, our investing thesis centered on its remarkable ability to continually generate 20% average annual returns—something the company has done for decades, recalls Ian Wyatt editor of High Yield Wealth.

That said, at the time, we were still circumspect: Could Altria (MO) keep the needle moving at such a remunerative rate? But Altria convinced us it was the exception to the rule.

Each year, the company rings more profit out of each cigarette sold; a good thing, considering the number of cigarettes sold each year is in a gentle decline.

In the most recent quarter, Altria reported EPS of $0.65, versus $0.32 in the year-ago quarter. The company posted strong revenue growth of nearly 5% to over $6.5 billion; this, despite a 3% decline in cigarette volumes.

To be sure, Altria continues to ring more money out of each cigarette sold, but growth is being helped along by rising smokeless tobacco sales. Revenue for the division was up 11% to $485 million year over year for the quarter.

And then there's Altria's vaunted dividend, which was raised 9.1% to $1.92 per share on an annual rate. This marks the 45th consecutive year the dividend has been raised.

Here we are, now a little more than two years later, and Altria has returned 53% to our portfolio and the shares have just hit another all-time high.

Altria represents the essence of dividend-growth investing: As the dividend goes, so goes the share price. We've experienced three dividend increases during our holding period.

No doubt these dividend increases, coupled with share buybacks, and relentless productivity gains, have led to Altria's price appreciation.

But not only have we been the beneficiaries of share-price appreciation, we've been the beneficiaries of the rising dividend payout. Higher yield, higher share price—it doesn't get any better.

We see no reason investors shouldn't continue to add to their Altria positions, because we see no reason Altria won't continue to generate 20% average annual returns.

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