In case you’re in your option to retirement, it might be time to start out placing some dividend stocks in your portfolio. They could not have as a lot upside as high-growth shares, however dependable dividend payers can present constant revenue in your portfolio with a lot much less danger. As you age, it’s not nearly rising the pie, however sustaining it. And dividend payers are typically superior to development shares on this regard.
Most shares with dividend yields approaching 10% function dangerous companies and are weak to slicing their dividends over the subsequent few years. Usually you’re higher off shopping for dividend payers with decrease yields which have the possibility to develop their dividend payouts over the subsequent decade. However there’s one dividend payer that won’t solely have the ability to maintain its 9%+ yield this decade, however has a transparent path to rising its dividend per share. Enter Altria Group (MO -0.07%), a misunderstood tobacco large that may be a no-brainer purchase for income-seeking traders.
Quantity declines, worth will increase
Altria is the main tobacco firm in the US with its Marlboro cigarette model. Marlboro has a greater-than-50% share of the premium cigarette market within the nation, delivery 52 billion Marlboro sticks simply by the primary 9 months of this yr.
Plenty of traders are involved about Altria’s enterprise as a result of declining utilization of cigarettes in the US. In accordance with the corporate’s personal estimates, grownup cigarette utilization is declining at a 2.5% annual fee, and has been since 2018. Via the primary 9 months of this yr, cargo volumes declined by near 10% in comparison with 2022, indicating that this utilization decline could also be accelerating.
At first, this appears like an enormous crimson flag for Altria’s enterprise. However it’s one thing the corporate has been coping with for many years, and counteracted with worth will increase on packs of Marlboro cigarettes. Regardless of these constant worth will increase, Marlboro has retained its dominant place in comparison with different cigarette corporations within the nation on account of buyer model loyalty.
During the last 12 months, Altria’s income is up 16.4% in comparison with 10 years in the past, which reveals the success it has had with these worth hikes. Working revenue is up much more, displaying a 42.4% improve in comparison with 10 years in the past. Decrease volumes and the identical income equals higher revenue margins, a pattern that ought to proceed for Altria this decade.
Getting ready for a world with out cigarettes
Although Altria has a few years left to boost costs on packs of Marlboros, the corporate realizes that cigarettes are on the way in which out in the US. Options like nicotine vapor and nicotine pouch merchandise are gaining speedy adoption. Altria has publicity to each by its current Njoy acquisition, in addition to its On! nicotine pouch model.
Inside 5 years, Altria has a purpose of reaching $5 billion in annual gross sales from smokeless nicotine merchandise. That will be round 25% of its trailing income immediately, and will have the ability to assist the corporate keep related if the cigarette enterprise will get a lot smaller. At a 50% revenue margin, that may equate to $2.5 billion in annual earnings. Not dangerous for an organization with a market cap of $73 billion and a cigarette enterprise nonetheless gushing money circulation.
MO Free Cash Flow Per Share knowledge by YCharts
Can the dividend continue to grow?
At a dividend yield of about 9.5%, Altria is likely one of the highest-yielding shares on the market. Nevertheless it nonetheless has loads of room to develop its dividend payout to shareholders over the subsequent decade. Administration’s personal purpose is for mid-single-digit development, which implies roughly 5% annual development.
Altria’s annualized dividend fee is at present $3.92 per share after elevating it for the 58th time in 54 years. During the last 12 months, the corporate generated free money circulation per share of $4.75, which leaves loads of respiration room to develop the dividend even when it has flat earnings energy over the subsequent few years.
The corporate does have some debt on its stability sheet, however it’s manageable, with solely round $1 billion or so in bonds coming due yearly for the subsequent 10. There must also be no downside refinancing its debt given how worthwhile the enterprise is.
One other lever Altria can pull — and has been pulling over the previous decade — is share repurchases. Altria’s share depend is down 11.3% over the previous 10 years because it constantly buys again inventory from current shareholders. At its present share depend of 1.77 billion, Altria’s nominal dividend payout is slightly below $7 billion. If it nonetheless had 2 billion shares excellent because it did 10 years in the past, that payout could be near $8 billion. As the corporate continues to scale back its share depend, it should have extra respiration room to develop its dividend per share.
Add all this collectively and I believe Altria may have a straightforward time sustaining and rising its dividend over the subsequent decade. This makes it a straightforward and low-risk dividend inventory to purchase in your retirement account.
Brett Schafer has no place in any of the shares talked about. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure policy.
