Investing

A Blue Chip Stock With a 9.5% Yield

Douglas A. McIntyre

Published: January 16, 2024 7:30 am

Yield stocks don’t grab many headlines during a period when the value of the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) have much more than doubled in the past year, compared to a 20% rise in the S&P 500. Why invest in any shares that might underperform the S&P 500 in 2024? (Apple’s stock is actually down in 2024, and tech share prices are shaky in general.) The answer is safety, stability and a yield much better than anything short of junk bonds.

Altria Group Inc. (NYSE: MO), the huge tobacco company, has a dividend yield of 9.4%. Altria stock generally does not move much, either up or down. However, it is lower by 7% compared to the start of the year. (These are the seven highest-yielding 2024 Dividend Kings to buy and hold forever.)

Altria’s revenue fell 4% year over year to $6.3 billion in the most recent quarter. Net income was up sharply from $224 million to $2.2 billion. The 35% net income margin shows the leverage Altria has in making commodity products on which it can get a strong brand price. Almost all its cigarette sales are under the Marlboro brand, which, according to BrandZ, is the 30th most valuable brand in the world at $57 billion. Altria’s chief executive officer, Billy Gifford, commented about the most recent financial results: “Our highly profitable traditional tobacco businesses were resilient in a dynamic operating environment during the third quarter and first nine months, providing fuel for our business transformation and significant cash returns to our shareholders.”

Part of Altria’s magic for yield investors is the $11 billion it has on its balance sheet. Altria does not need this money for operations because of positive cash flow. That means the dividend is solid. The tobacco business may be out of favor, and massive shareholder lawsuits in 1998 that cost the industry $246 billion. Yet, the financial effects of that are long gone as a factor in Altria’s dividend.

Altria’s pitch to investors who are reluctant to invest in a company that makes a deadly product is that it is creating less deadly tobacco products. That is how it describes itself to Wall Street. It is what management calls “Moving Beyond Smoking,” which makes it a “tobacco harm reduction company.” This means producing “smoke-free” tobacco products. Nevertheless, cigarettes drive Altria’s financials and will for many years.

Altria stock investors who are willing to ignore the ill effects of smoking get a tremendous and steady yield.