Is this king of high-yield dividends a buy?

Income investors would be well advised to select only the highest quality dividend-paying stocks with proven business models that generate tons of profits. Indeed, these stocks are the most likely to regularly pay ever-increasing dividends to their shareholders.

As a dividend king with a track record of 51 consecutive years of rising dividends, few stocks can match the stability of the tobacco titan Altria Group (NYSE: MO). But is this high-yielding dividend stock a buy for yield-hungry investors? Let’s dive into the fundamentals and valuation of Altria Group to answer the question.

Net revenues and profits continue to grow

While Altria Group’s traditional cigarette volumes continued to decline in 2021, the company was again able to generate higher net excise duty revenue and non-compliant diluted earnings per share (EPS). GAAP (adjusted).

Adjusting for trade inventory movements (such as consumer pantry stocking in early 2020 due to COVID-19) and timing differences, domestic cigarette shipment volumes were down 6% from compared to 2020. The good news for Altria Group is that its total retail cigarette share only fell 30 basis points year-over-year to 48.8% in 2021. A 20 basis point increase in basis of Marlboro’s market share at 43.1% was slightly more than offset by a 50 basis point drop in cheap cigarettes to 3.4%. Finally, the market share of Altria Group’s other premium cigarettes remained unchanged at 2.3%.

Altria Group’s stable market share gives it exceptional pricing power, which it demonstrated in 2021 by passing on increases in production costs to its consumers through higher prices. This is what helped the company’s total revenue net of excise taxes to increase 1.3% year-over-year to $21.11 billion in 2021.

Altria Group’s price increases were only partially offset by higher costs, which explains how the company was able to increase its non-GAAP net margin by 140 basis points to 40.4% in 2021. Combined with its slightly higher revenue base and lower diluted weighted average share count, Altria Group’s non-GAAP diluted EPS increased 5.7% to $4.61 in 2021.

Looking ahead, analysts predict that Altria Group will be able to generate annual earnings growth of 5.4% over the next five years. This encouraging growth forecast is due to the company’s strong brands and pricing power.

A payment with a margin of growth

Just because Altria Group looks set to continue growing revenue and earnings for the foreseeable future doesn’t mean the stock’s massive 7.1% dividend yield is safe.

Fortunately, Altria Group’s non-GAAP diluted EPS payout ratio last year was 75.5%, just below the company’s long-term target of 80%. This gives Altria Group a cushion to maintain its dividend in almost any situation.

Further proof that the dividend seems safe, Altria Group’s free cash flow payout ratio was 77.9% in 2021. This again gives the company a margin of safety to navigate most operating environments. , which explains how it was able to increase its dividend. for more than half a century.

A well-run business trading at a discount

Altria Group’s track record and fundamentals indicate an excellent quality business. But I think what confirms that the stock is a buy is that its valuation is well below the average for its sector.

Altria Group trades at a forward price-to-earnings ratio of 9.8, which is significantly below the tobacco industry average of 18. Astute investors may speculate that the reason for this major discrepancy between Altria Group and its industry’s assessment is that the prime growth outlook may be well below the industry average. However, that doesn’t seem to be happening.

Indeed, the Altria Group’s expected annual earnings growth rate of 5.4% is only slightly below the industry average of 8%. Altria Group’s unmatched track record in its dividend-raising industry should translate into a significant valuation uptick, making it a solid buy for retired and value-oriented investors.