Tobacco giant Altria Group (MO -0.04%) recently reported full-year 2022 earnings that gave the stock's share price a jolt. Altria has been a troubled stock in recent years -- its highly public investment in Juul Labs wasted billions in capital, and worries have persisted about how inflation might impact its customers' spending habits.
However, fourth-quarter results answered some of these questions profoundly, and now investors are looking at a stock paying a dividend yielding almost 8%. The stock's conservative valuation could mean there's room to run if sentiment has finally turned positive. Here's why you should consider locking in this huge dividend before it's too late.
Business as usual? It's always been
Altria's earnings showed that its core tobacco business is running like clockwork. Adjusted earnings per share (EPS) rose 8.3% year over year in the fourth quarter and 5.0% for the full year. This growth came despite Altria shipping nearly 10% fewer smokeable products in 2022 than in 2021. How is this possible?
Tobacco is a straightforward business -- fewer people across America smoke cigarettes yearly, so Altria slowly raises prices enough to offset the lower volumes and grow profits. Will this strategy work forever? Hard to say, but you can see below that it's worked for many years. The company's $12.8 billion investment in Juul was a disaster, but it was never a big contributor to Altria's existing business -- the negative publicity around that ill-fated deal soured sentiment on the stock despite the company's growing profits.
Data by YCharts.
The take-home lesson from this chart is that tobacco is a very resilient business. Companies across the economy have spoken of inflation and supply chain woes hurting operating results. But Altria says very bluntly in its earnings release that inflation had no impact on its operations in 2022. But what about inflation's effect on consumer spending habits? Management noted higher volume declines and a shift to discount brands. The result? Ho-hum, another year growing EPS by 5%.
That sweet, sweet dividend
You could assume the large majority of investors hold Altria stock for its dividend. Altria's dividend is a borderline fixation -- management has raised the payout 57 times in the past 53 years, and you get a staggering 7.9% dividend yield at the current share price.
Data by YCharts.
You'll see the dividend payout ratio is a bit high at 81%, but that's by design. Management targets 80%, and the company's mid-single-digit earnings growth means you can expect another raise in the coming quarters. The company just announced a new $1 billion share repurchase program, which underlines management's confidence in its cash flow.
Here today, gone soon?
Altria's share price has fallen almost 30% in the past five years. But because Altria's profits have kept growing, the stock's valuation has continually compressed like a spring coiling. Today, shares trade at a forward price-to-earnings ratio (P/E) of just over 9.
Data by YCharts.
Consider that the S&P 500, which grows by an average of 10% annually over the long term, currently trades at a P/E ratio of 18.5, about twice as high. A stock growing at 5% (2022 EPS growth) trading at half the valuation of an index historically increasing at 10% annually seems fair, right? But that doesn't factor in Altria's massive dividend.
If you're looking for 10% total annual returns, Altria only needs to grow profits about 2% after factoring in the dividend. Altria has continually demonstrated its core business is still functioning at a high level, so investors may reevaluate the stock and award it with a higher valuation. In other words, Altria's juicy dividend yield might not be on the market for too much longer.
