Is It Too Late to Buy Altria Stock? | The Motley Fool (2024)

With shares up 24% just since April's low, the idea of stepping into a new stake in Altria Group (MO -0.04%) right now could be more than a little intimidating. Making the idea even more daunting is the fact that the stock's currently trading at a two-year high. There just might not be enough upside left with this tobacco name to plug into right now.

Or, maybe there is. Take a step back and look at the bigger picture. You'll see plenty of value then, particularly if you're an income-minded investor.

Altria is facing an obvious (and relentless) headwind

Altria is of course the tobacco giant formerly known as Philip Morris. The brand name is still around in the United States as well as overseas, although Philip Morris International handles the brand outside of the U.S. these days. Altria's other brands include Marlboro, smokeless tobacco products from Copenhagen and Skoal, and vaping brand NJOY. It's also dabbling in the heated tobacco space, although this initiative's still miles away from becoming a major profit center.

The stock's been challenging to own for more than a couple of decades now for an obvious reason. That is, the world's smoking-cessation efforts are getting traction.

Although few would dispute that Altria's sheer size and name recognition make it a force to be reckoned with within the tobacco industry, it's equally tough to ignore that the prevalence of smoking is shrinking. For perspective, numbers from Gallup indicate the portion of the United States' population that regularly smokes has fallen from more than 30% as recently as the 1980s to around 15% now, and it's still falling. The advent of alternatives like vaping or heated tobacco isn't helping much either, as they, too, pose well-touted health risks.

The end of the tobacco business (along with its close cousins) is on the horizon, even if it's a distant horizon. That's why investors haven't really known what do with the stock for years now.

However, there's an important reality that's being overlooked.

Still a cash-rich business

Sure, the tobacco business is living on borrowed time. That's particularly true in the United States where Altria is focused, although it's still true (albeit to a lesser degree) overseas; there's just no real growth opportunity ahead. To this end, Altria's net revenue fell another 1% during its first fiscal quarter of this year, extending a long-standing streak of near-stagnation.

What's being missed, however, is how much money is still being made in the meantime, and how much more there is to be made. Roughly one-third of every single dollar Altria collects in revenue is converted into net income, extending a long-standing streak. And the company continues to repurchase stock, making its remaining outstanding shares more profitable, also extending a long-standing streak.

MO Revenue (Quarterly) data by YCharts

These trends could remain place for a long, long time, too.

While it's selling fewer and fewer traditional cigarettes every year, its other products are offsetting most of this attrition. For instance, shipments of its On! nicotine pouch grew 32% during Q1, accelerating its previous growth pace of 25%. It also shipped another 1 million NJOY devices, improving on Q4's tally of 900,000.

More to the point for interested investors, this continued cash flow means dividends. Only about three-fourths of Altria's profits are dished out in the form of dividends, leaving plenty of wiggle room should the company encounter turbulence as it did when the pandemic first took hold in early 2020.

That's a dividend, by the way, that's not only been paid like clockwork for decades now, but also raised every year for the past 54 years. Don't look for this streak to end anytime soon either.

Not forever, but certainly for the long haul

The streak will eventually end, of course, even if the time until that point is reached is measured in decades rather than years. Given the nature of its business, Altria simply can't be viewed as a true "forever" stock.

It can absolutely be seen as an income stock worth holding until further notice, though. In fact, with its current forward-looking dividend yield of nearly 8% it's paying more than most of the market's highest-yielding bonds are at this time.

Just keep in mind that once bonds mature, you get the initial principal back. As publicly traded companies' businesses slowly fade away, conversely, their stocks lose value. That's arguably the chief reason Altria stock's been so easily upended since the 1990s; investors readily see even the slightest of problems as a major red flag.

The end of Altria's steady cash flow isn't near enough to worry about just yet, though.

Investors are seemingly starting to see this, by the way, which is part of the reason the stock's been soaring of late. The other part is just that dividend-paying consumer goods stocks are more compelling in challenging economic environments that specifically push growth stocks out of favor. Either way, the overall bullish case holds water here.

This might help: Even with the stock's recent rally, shares are still 33% below their 2017 high, and still priced cheaply at only around 10 times next year's projected per-share profits of about $5. That doesn't leave a great deal of downside risk from the stock's present price even with the recent run-up.

So, no -- it's not too late to buy Altria stock.