Stodgy tobacco stock Altria Group(NYSE: MO), most known for selling Marlboro cigarettes in the U.S. and paying hefty dividends to its shareholders, has sprung to life this year. The stock has returned over 34% year to date, good enough to outpace the S&P 500, even when excluding dividends.
It's a pleasant gift to investors, who also enjoy a whopping 7.5% dividend yield from Altria.
Such significant price gains are rare; Altria is a slow grower. The Dividend King's earnings tend to rise at a low-to-mid single-digit rate -- just enough to keep that dividend plodding higher year after year.
Therefore, investors must pay close attention to the price they pay for shares. Does the stock's success in 2024 mean investors should look elsewhere in 2025? Here's the case for Altria as a buy, sell, or hold.
Altria's dividend playbook still works, just as it has for decades
The tobacco business is remarkably resilient, maybe more so than any other industry. Altria's core business is selling traditional cigarettes in the U.S. However, the country's smoking rates have been in decline since the mid-1960s.
As a result, Altria ships fewer cigarettes with each passing year. In the third quarter, for example, smokeable product volumes declined 8.4% year over year, yet the company's operating income increased 7.1% thanks to price increases.
Over the past decade, Altria's annual revenue has grown just 13%, but free cash flow, which pays the dividend, has nearly doubled:
Data by YCharts.
This playbook has worked for decades and continues to work. It may not last forever, but there's no cause for immediate concern. Altria's dividend payout ratio is manageable at 80% of cash flow, down from a decade ago. Additionally, the company boasts a BBB (investment grade) credit rating with a positive outlook from Standard & Poor's.
Altria stock is best for a specific type of investor
Altria's consistency is excellent for income-focused investors and should give those who prioritize income over returns the confidence to buy and hold the stock.
But let's not get it twisted -- the dividend is probably the only reason to own Altria. The company doesn't produce enough share price growth to keep up with the broader market. In fact, the stock has only appreciated 11% over the past 10 years, compared to the S&P 500's 183% gain. That said, the dividend does make a big difference -- Altria's total return over the past decade was 109%. Still, investors who want to maximize their returns should look elsewhere.
Part of the problem is Altria's continued dependence on smokeable products, which still represent most of the business. The segment accounted for 89% of Altria's operating income in Q3 2024. Altria is developing next-generation products like oral nicotine pouches and vaping devices, but those are relatively small businesses for the time being.
Altria will likely remain a slow-and-steady grower with an outsized dividend for the foreseeable future, making the stock ideal for retirees and other income-focused investors. Within the tobacco industry, those looking for more growth might consider Philip Morris International, which is much further along with next-generation nicotine products.
Is the stock a buy, sell, or hold?
Analysts estimate Altria will grow earnings an average of 3% to 4% annually over the next three to five years. So, why has the stock done so well this year?
The market reacted well to Altria's Q3 results, but the stock's momentum began earlier. I'd point to the Fed's rate cut as a potential cause, something I alluded to previously. Lower interest rates could make dividend payers like Altria more attractive since it would mean alternatives like savings accounts don't yield as much. Altria is traditionally a stable stock with a beta of just 0.64, so investors may be more inclined to park money in it.
Altria trades at a forward P/E of 10.5 as of this writing, its highest valuation since the Fed began hiking rates at the beginning of 2022:
Data by YCharts.
At a PEG ratio of about 3.1, I don't think Altria's earnings growth justifies much more price upside from these levels, though investors could continue buying into Altria if yields fall in other places. Again, its appeal will depend on your investing goals. Do you want income? Altria is an easy hold, maybe even a buy if you're honed in on the dividends. Otherwise, the buying window is probably closed, and those looking for market-beating returns should look elsewhere.
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Justin Pope has positions in Philip Morris International. The Motley Fool has positions in and recommends S&P Global. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
