Fire Up Your Portfolio With This Dividend King

This is a scary time to be a dividend growth investor. With the U.S. economy having officially entered a recession in February, and the coronavirus pandemic a lingering source of uncertainty, investing in high-yield stocks can seem like walking through a minefield. Companies across multiple industries, such as energy, retail, travel, restaurants, and more, have cut or suspended their dividends in 2020 as their profits collapse. But some companies, such as Altria Group , continue to deliver for shareholders. The company recently announced a strong quarterly earnings report, with an added bonus of a dividend increase. Altria has now increased its dividend for 51 consecutive years, placing it on the exclusive list of Dividend Kings. Altria has a positive growth outlook, a low stock valuation, and a very high dividend yield above 8%. For all these reasons, we continue to view Altria stock as a Buy. Still Smoking Altria is a consumer staples giant. It sells the Marlboro cigarette brand in the U.S. and a number of other brands of other products that are not for smoking, including Skoal and Copenhagen, and the Ste. Michelle brand of wine. Altria also has a 10% ownership stake in global beer giant Anheuser-Busch InBevchelle . Altria is a large-cap stock with a market capitalization of $78 billion. Altria this week reported financial results for the 2020 second quarter. Results were strong across the board. Revenue of $5.06 billion fell 2.5% year-over-year, slightly beating expectations by $20 million. Underneath the surface, Altria outperformed on many important metrics within its revenue figure. For example, smokeable product volume (which refers to the core cigarette brands) declined 8.7% year-over-year, a full percentage points better than expectations. Smokeless product volume dropped 1%, far better than the 2.7% drop that was anticipated. Adjusted earnings-per-share came to $1.09, again beating estimates which called for $1.06 per share. Adjusted EPS increased 1% year-over-year, thanks to the benefits of cost controls and share repurchases. For all of 2020, Altria expects its adjusted diluted EPS to be in a range of $4.21 to $4.38, compared with $4.21 generated in 2019. At the top of the range, Altria's adjusted EPS could rise as much as 4% in 2020. This represented a solid quarter for Altria, and it has been a very impressive first half of the year. At a time when so many companies are struggling to stay afloat, Altria hasn't skipped a beat. The company manufactures products people consume on a daily basis, regardless of the economic environment. Lighting Up Future Growth Altria operates in a declining industry. The tobacco industry broadly is seeing volumes decline each year, a long-running trend that has taken place for over a decade. The trend is not likely to end any time soon, as consumers continue to give up smoking. But Altria now sees full-year domestic cigarette industry volumes declining 2% to 3.5% for the full year, down materially from previous expectations of 4% to 6%. And, Altria is leading the way by investing in adjacent categories that will see demand rise as smoking continues to decline. Specifically, Altria has made huge investments in vaping, oral nicotine products, and cannabis, which will all benefit from the trend of declining smoking rates. Altria separately invested $13 billion to acquire a 35% stake in e-cigarette maker JUUL, and $1.8 billion for a 45% stake in marijuana producer Cronos Group . These investments pave the way for Altria to benefit tremendously from two of the biggest growth categories in the industry: vaping and marijuana. In addition, Altria recently invested $372 million to acquire an 80% ownership stake in Swiss tobacco company, Burger Söhne Group, to commercialize its brand of oral nicotine pouches. Altria's oral tobacco segment grew revenue by 10% in the second quarter and through the first half of 2020. This does not include Altria's existing investments in wine and beer, through its ownership of several wine brands as well as a stake in global beer giant Anheuser-Busch InBev. Finally, Altria is aggressively expanding its own e-cigarette brand IQOS. In July, IQOS received approval from the Food and Drug Administration to be marketed as a modified-risk tobacco product. Along with its earnings report, Altria announced it will expand IQOS to four additional markets, and will also partner with retailers over the next 18 months to make the product line more available. Add it all up, and Altria is well-positioned for success in a post-cigarette world. The company should continue to generate revenue and earnings growth, which will naturally result in annual dividend increases for many years ahead. Altria: Buy On Valuation and Dividends At a time when stocks have nearly recovered all of the losses incurred from the coronavirus pandemic, Altria stock still looks cheap. Shares trade for a 2020 price-to-earnings ratio of 9.9-times, based on projected adjusted earnings per share of $4.30, which is at the midpoint of management guidance. We feel a price-to-earnings just under 10 is far too low for the company, given its massive competitive advantages, which include brand loyalty, leading market share, and vast efficiencies in manufacturing and distribution. Our fair value estimate for Altria stock is a P/E ratio of 11-times, a reasonable multiple for a highly profitable company with a strong moat and a lengthy track record of success, that is facing volume declines in its core business. Still, Altria stock appears undervalued, and a rising P/E to our fair value estimate would lift annual returns by 2.1% per year through 2025. The other major factors that will generate returns for shareholders are future earnings-per-share growth and dividends. We expect Altria will grow adjusted EPS by approximately 3.2% per year over the next five years, consisting of revenue growth through price increases, as well as share repurchases. Lastly, Altria's high dividend yield of 8.1% after raising its quarterly dividend by 2.4%. The combination of a rising P/E multiple, future EPS growth, and dividends results in total expected returns of 12% to 13% per year over the next five years. We rate Altria stock a Buy for value and income investors. While high-yielding stocks across multiple industries have had to cut or suspend their dividends to preserve cash amid today's uncertainties, Altria continues to generate strong cash flow and raise its dividend. With future growth potential, over 50 years of dividend increases and a high yield exceeding 8%, Altria is a highly attractive stock for income investors.

Fire Up Your Portfolio With This Dividend King

Altria has future growth potential, over 50 years of dividend increases and a high yield exceeding 8%.

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