Noted Wharton economist Jeremy Siegel stated in his book The Future for Investors that Altria Group Inc (NYSE:MO), formerly Philip Morris, was the top performing stock from 1925 to 2003. When you analyze Altria’s business, it’s easy to understand why.
At the same time, the world is a different place than it was when Altria was in its prime. Detractors of investing in sin stocks will point to a number of factors that, they contend, are sure to mean the end of big tobacco.
These fears are rolled in to the two primary reasons for why Altria shareholders have made so much money over these many decades. You’ll soon see that these two reasons are still largely intact, and as a result, make Altria just as much a buy today as it was decades ago.
Reason #1: High dividend yield, year in and year out
For decades on end, the company behind Marlboro cigarettes, one of the most valuable brands in the world, pumped out steady profit growth and returned a great deal of those profits through to shareholders. Like it or not, Altria’s history places it in the hall of fame of corporate America. Altria Group Inc (NYSE:MO)’s history stretches back more than 180 years, and for many of those years, Altria has paid a dividend to shareholders.
Of course, Altria isn’t the only tobacco company that pays a hefty dividend. Industry competitors include Reynolds American, Inc. (NYSE:RAI) and Lorillard Inc. (NYSE:LO).
Close peer Reynolds American has a wide variety of cigarette brands including Camel, Pall Mall, Winston, and Kool. While Reynolds American offers a hefty 5.3% dividend yield, the company hasn’t performed very well in recent years. Revenue has declined for two years in a row, with full-year 2012 sales dropping almost 3%. Even worse, diluted earnings per share fell almost 7% in 2012 year-over-year.
Lorillard is much smaller than Altria, with a market capitalization of $16 billion. The company manufactures the Newport and Kent brands, and in February reported decent, if unspectacular, full-year 2012 results. Revenue and diluted earnings per share increased 2.4% and 5.6%, respectively, and the stock offers a 5% dividend yield at recent prices.
Altria Group Inc (NYSE:MO), meanwhile, continued to prove why it’s one of the market’s premier slow-and-steady stocks in 2012. The company recorded 3.5% growth in full-year revenue and saw its diluted EPS jump 25% year over year.
Most importantly, Altria increased its dividend by 7.3% in 2012. Altria has increased its dividend 46 times in the last 43 years.
Reason #2: A restrained valuation
The combination of fear surrounding declining smoking rates and fear of additional government intervention in the tobacco business served as an anchor on Altria Group Inc (NYSE:MO)’s valuation for years. Despite paying and raising its dividend every year and reporting solid earnings growth for decades, investors were never convinced of the future outlook for tobacco.
As a result, Altria’s valuation never got out of hand. That meant that all those quarterly dividend payments could have been reinvested at low prices, thereby allowing investors to buy a lot of shares over decades of dividend reinvestment.
Interestingly, you’ll notice that those fears are still around today. Many investors shun tobacco stocks to make a social statement. Others fear the government, thinking that higher tax rates and/or regulations are akin to an axe being wielded above Big Tobacco’s head.
I respect an individual’s decision to avoid tobacco stocks for social reasons. However, the latter fears are, I believe, foolish. While you can certainly question the collective intelligence of our lawmakers, I don’t think anyone is dumb enough to kill the goose that lays the golden eggs. Consider the many cash-strapped states and municipalities that depend sorely on the excise taxes that tobacco sales provide. They’d have to be absolutely insane to do anything that turns off the spigot that is tobacco tax revenue.
The Foolish bottom line
Altria Group Inc (NYSE:MO) today, as it has for decades, yields nearly 5% and trades for a modest valuation. The stock exchanges hands for about 16 times trailing EPS, about in-line with the valuation on the broader market.
If you consider yourself a Foolish investor, meaning you understand the merits of long-term, buy-and-hold investing, then you can see how valuable Altria can be for your portfolio. Because human beings have vices, often distasteful ones, and since states and municipalities desperately need cash now more than ever, Altria will be around for a long time to come.
That means that new investors can enjoy decades of big dividends and the opportunity to reinvest those dividends into more shares, creating something of a snowball effect that will lead to a comfortable (and likely early) retirement. I’m an owner of Altria shares, and I’d advise you to join me.
Robert Ciura owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned.
The article Is Altria a Buy? originally appeared on Fool.com.
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