Is It Too Late to Buy Altria Group Stock?

Tortoise-like tobacco giant Altria Group (MO -0.45%) has been uncharacteristically hot this year. Shares are up over 15% in 2024, an uncommon surge given the stock’s poor share price performance over the past five years.

The reason for the stock’s run? It could be that Altria put its disastrous Juul investment in the rearview mirror, giving investors a chance to focus on what’s still a very resilient core business that revolves around its blue chip smokeable brand, Marlboro.

Nobody will mistake Altria for a high-growth company, meaning investors should be cautious. A slow-growth stock can quickly become expensive when shares start logging double-digit gains.

So, is Altria’s good fortune here to stay, or is this just a short-term rally? Here is what you need to know.

Altria’s dividend remains the star attraction

Tobacco is a notoriously difficult habit to quit. The resulting pricing power has paved the way for years of steady profits for the industry’s players despite the long-term decline of smoking rates in the U.S. Altria owns Marlboro, the leading cigarette brand in the country with an estimated 42% total retail market share and a 60% stranglehold on the premium segment.

It’s made Altria a Dividend King; the company has paid and raised its dividend consistently for over five decades, a remarkable feat which has seen the payout survive recessions, war, and the general ups and downs of being a public company.

Investors can enjoy a massive dividend yield of 8.4% at today’s share price, and Altria can afford it. The dividend payout ratio is roughly 75% of cash flow, and management likes to keep the ratio near that level. You can’t buy many ultra-high-yield dividend stocks and sleep well at night, but Altria is an exception.

Resetting expectations after a rough five years

Altria’s valuation got too high in the mid-2010s when shares traded hands at over 23 times earnings, which is very high for a tobacco company. Not only did the stock’s valuation begin to cool off, but the Juul debacle, which began in late 2018, further tanked Wall Street’s sentiment toward the stock and drove the P/E ratio to single digits.

Frankly, the Juul investment was a catastrophic error that has hung over the stock for years. Altria only formally parted ways with Juul last year.

Today, shares trade at a forward P/E of 9.2:

Data by YCharts.

The silver lining is that now is a great time to reassess and reset expectations. After all, Juul is now in the past, and the stock’s valuation isn’t in the stratosphere anymore.

So, is Altria a buy?

A stock paying a more than 8% dividend yield only needs a few points of earnings growth to generate double-digit total returns. You can see above that shares may have gotten too cheap in January this year, which helped spring Altria’s recent rally.

The big question is, what might happen next? Fortunately, Altria’s valuation still makes a lot of sense, which reduces the risk of another horrid stretch like the one investors just endured.

Altria has grown its earnings by an average of 4.4% annually for the past five years, and management has a steady path to continuing that pace. Not only can Altria continue slowly raising its prices, but it can also repurchase shares to help boost earnings growth. It announced an accelerated repurchase program earlier this year, which it funded with proceeds from selling a piece of its multibillion-dollar stake in Anheuser-Busch InBev.

Assuming Altria continues to deliver similar results to those in recent years, shares may now have some total returns appeal for the first time in a while.