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Sunday, November 22, 2020

Altria's Safe and Growing 8.5% Dividend Yield is a Great Investment Now

Altria Group Inc. (Ticker: MO) has been a stock that I have been monitoring for quite some time. I have stocks of this company in my dividend growth portfolio. Suppose you have no idea what Altria is all about. In that case, this company is an American company that is one of the world's largest producers and marketers of tobacco, cigarettes, and related products. I did a stock analysis report on this company that I have posted in this blog. When I wrote that report, its stock was trading at a $50 to $55 range. The company is recently trading in the $39 to $41 range as of (November 11, 2020). I have incurred unrealized loss for holding this company in my portfolio; however, this does not stop me from believing in this company.
The current price of this company is trading at now caught my attention. Altria offers investors an incredible 8.5% dividend yield at the current price. This stock has the potential for even more significant capital gains and total shareholder returns if valuations normalize. It is a strong investment opportunity, and recent price weakness presents a compelling entry point for new investors to enter. This blog post will explain why Altria Group Inc. (Ticker: MO) is an outstanding stock to invest in now. I love the high dividend yield this stock provides, and it can be an opportunity for new investors to enter. Moreover, I will also share the risk factors of investing in this company. 
Strong Dividends & Potential Returns
In my opinion, investors should aim for strong total shareholder returns and not only relying just on high dividends. Indeed, we as investors should not just seek high dividend yield since it can backfire. However, when yields are high, investing in great value companies usually leads to strong total shareholder returns due to a combination of strong dividends and capital gains from the rising valuation.
Altria Group Inc. (Ticker: MO) yield a high dividend rate since the beginning of 2009. In 2007, the dividend yield declined, but it has risen ever since. Investing in Altria when yields were high, from 2009 to 2017, would have led to outstanding and market-beating total shareholder returns. 
If you had invested in the company when the yield was low, from 2017 onwards, it would have led to significant capital losses and severe underperformance.
Long-term investors that held the stock during the entire period from 2007 till now would achieve returns similar to the S&P 500. 
As an investor, you want to enter at the right time to have an outstanding performance in your portfolio. Altria Group Inc. (Ticker: MO) generally outperforms when yields are high and underperforms when low. The company's current situation is quite similar to that of 2009. In both cases, Altria is/was trading at a highly distressed price and valuation. This is due to weak economic conditions and bearish market sentiment.
Investors who had the foresight, or the luck, to invest during 2008 were able to lock in high yields and benefited from strong capital gains in the following years. I was looking at Altria's stock when I was still studying in the United States in the year 2009. I remembered being interested in investing in this stock, but I was not managing my own portfolio at that time. Since I was not managing my own portfolio at that time, I missed the opportunity to make this investment.
However, looking at Altria's stock now reminded me of being in the same situation as 2009. This time is different since I am managing my own dividend growth portfolio. I have been purchasing Altria's stock to my portfolio now and planning to keep purchasing more shares of this company when I have additional cash from dividends and rental income.
I analyzed this stock and discovered that Altria outperformed when the company is yielding a high dividend. I have attached my prove (chart) on the bottom. The chart shows that Altria's total shareholder returns are most robust when yields are highest (see 2000 and 2009 in bold). The company, however, underperformed when the company is yielding a low dividend. You can see the evidence by taking a look at 2014 Altria's dividend yield. The company was not performing as well as when the yield was high.

Returns of this company are particularly weak these past two years. This is due to the ongoing coronavirus outbreak. Returns were also much stronger during the 2000s, as the company experienced more significant revenue and dividend growth. I'm not trying to imply that dividend yield is everything, but they are strongly correlated with total shareholder returns.
Altria Group Inc. (Ticker: MO) currently yields 8.50%. Yield this high have led to outstanding total shareholder returns for the company's investors in the past. I believe this time, it will become an outstanding investment for investors who are interested in entering now.
Altria Group Inc. (Ticker: MO) is my third largest position in my dividend growth portfolio as of now (November 2020). I have relocated my portfolio by selling some of my other holdings to increase Altria's holding. I believe Altria's stock price has the potential to outperform in the coming years. Moreover, I can enjoy the high dividend payout this company provides. As a dividend growth investor, I believe investing in this company now is a great opportunity. I am confident about this purchase and believe it will become an excellent investment holding in my portfolio
Dividend Sustainability Analysis
Altria's dividend yield is paid for and fully covered by its underlying earnings and cash flows. The company's investment thesis rests on its dividends. Its $3.36 annual payout has a 75% earnings payout ratio. This means that the company generates enough earnings in the first three quarters of the year to pay for its dividends and use the remaining quarterly earnings to grow its asset base, pay down debt, or pursue acquisitions. 

Altria boasts a 77% cash payout ratio similar to its earnings payout ratio, meaning that it can quickly generate the necessary cash to pay its dividends. Some companies have issues converting accounting income into cash, but this is not the case for Altria.  
Furthermore, dividend growth in this company is likely. This is because the company's payout ratio is below management's 80% long-term target. Some companies engage in destructive actions or strategies to sustain their dividends, but this is not the case for Altria. The company does not engage in destructive asset sales to fund its dividend, with its asset base growing over these past few years.

Asset growth should lead to additional revenue, earnings, and cash flow growth for the company, serving to sustain and increase its dividend.
Altria's dividend payment and asset growth base also have not diluted shares in the company. In fact, the company's outstanding shares are decreasing year after year, which means that the company's management is purchasing back shares. 

Looking at the above facts and information shows that Altria's dividend is safe. I believe the company can sustain paying its dividends to shareholders. Before investing, I make sure that the company I am interested in investing in can keep paying its dividends. I do not want to invest in dividend-paying companies that are potentially dividend trap.
So, What are the Risk of Altria?
Altria indeed offers investors strong dividends and the potential for an even greater capital gain, but that does not mean the company does not have any risk. I found two key risks when analyzing and researching this company.
First is the fact that tobacco use is decreasing across the world. This means there will be fewer customers, sales, and revenue for the company. Although this is significant negative news for the company and its shareholders, Altria's management has implemented a strategy meant to counteract by developing and marketing healthier alternatives to more traditional cigarettes. As shown in the company's revenue, earnings, and cash flow growth rates, the strategy is working. However, investors should be aware of this issue.
Second is the fact that Altria's investment thesis is partly predicated on rising valuations. The market can remain irrational longer than you can remain solvent. Even if the company can pay its dividends to shareholders, this does not guarantee that the company stock price will go up. I am not worried about not having Altria's stock price increase in the short-term period. In fact, I want to accumulate more shares of this company into my dividend growth portfolio.
In my opinion, I believe Altria's positives outweigh the risks I mentioned above. However, I want to make sure that investors know all the facts before investing their hard-earned money. By providing the risk factors in this article, investors can be informed about this stock's complete detail.

I hope this report on Altria Group Inc. (Ticker: MO) can explain why this company is a potential opportunity for an investor. Altria's high dividend yield is lucrative for investors to enter and an opportunity to benefit from holding this company in your portfolio. I believe that Altria is a safe dividend-paying stock for anyone who wants to receive passive income.
Despite having an unrealized loss for holding this company in my portfolio, I have increased Altria's holding. I am confident about making this investment purchase on Altria, as it has become my third largest position in my portfolio. I hope Altria's stock price can decline more to buy more of this company with my dividends and rental income. As a dividend growth investor, I am not worried about short-term price fluctuation. I want to see the long-term result of investing in this company.
If you are a dividend growth investor, Altria is the right candidate for investors to choose from. However, please make sure you do more of your own research about this company before investing your hard-earned money. I do not want readers to lose their money because they did not do the proper research before investing. Please take a look at my previous article about this stock so that you can get more informed before investing your money.

1 comment:

  1. Yield isn't everything when it comes to finding the best dividend stocks. Income investors know there's no substitute for regular dividend increases over the long haul. Interested in market capitalisation, check out pensionkings.com.