By: Dividend Sensei
While dividend growth stocks in general have proven to be the best way to grow your wealth over time, the venerable dividend aristocrats hold a special place in the heart of income investors. That’s because these blue chip stocks, who have all been raising their dividends for at least 25 consecutive years, are time tested companies with the proven ability to safely provide growing income in all manner of economic, industry, and interest rate environments.
And in this century the aristocrats have managed to nearly double the S&P 500’s total returns while enjoying 26% less volatility. And while the longest bull market in US history means that many aristocrats are richly priced, the fact is that no matter how high stocks fly, some blue chip is always on sale.
Altria (MO) is one such example. This legendary recession proof aristocrat has proven to not just make a great source of generous, safe, and steadily growing income over the decades (49 straight years of rising dividends), but also a market crushing, money minting machine. In fact, over the past 30 years Altria has been one of the best performing stocks period, multiplying investor wealth about 1,100 fold.
- Altria 30 Year Total Return: 108,900% (26.3% annualized return)
- S&P 500 30 Year Total Return: 1,390% (9.4% annualized return)
Now it’s unlikely that Altria will repeat that stunning outperformance going forward. But there are three reasons why I believe it can achieve about 15% annualized total returns over the next decade (about three times what the S&P 500 is likely to deliver). That would be enough to quadruple your investment and makes Altria one of the best high-yield aristocrats you can buy today.
1. Altria Is A Recession Proof Money Minting Machine
Founded in 1919 Altria is America’s most dominant tobacco company. It has a large number of very popular brands marketing things like:
- Cigarettes (Marlboro) – 85% of sales
- Chewing tobacco (Skoal & Copenhagen)
- Cigars: (Black & Mild)
- Vaping products (MarkTen)
- Premium Table Wines (Columbia Crest)
It also owns 10.5% of Anheuser-Busch Inbev, largest beer company in the world.
In total Altria’s collection of leading brands means it commands 26%, 40%, and 55% market share in cigars, cigarettes, and chewing tobacco respectively. The key to Altria’s wide moat (competitive advantage) is the fact that no matter what the economy is doing, its customers continue to buy its products. This means Altria’s sales and earnings are largely recession proof. For example during the Great Recession, while most companies saw sales and earnings collapse, Altria’s revenue and EPS actually rose 10%, and 15%, respectively.
But what about the secular decline in US smoking rates which has been occurring rapidly since 1965? Doesn’t that mean that Altria’s sales, earnings, and dividend growth can’t continue?
Well actually no. Altria has managed to become a powerhouse earnings and dividend growth machine despite half a century of declining cigarette volumes. What makes this possible is the strong brand loyalty that smokers and tobacco users have which gives Altria incredible pricing power. This combined with its enormous economies of scale (efficient and low cost manufacturing and distribution network) makes Altria into one of the most profitable companies in its industry and a true money minting machine.
- Gross Margin: 49.8% (industry average 46.3%)
- Operating Margin: 39.7% (industry average 13.7%)
- Net Margin: 29.8% (industry average 9.9%)
- Free Cash Flow Margin: 26.3% (sector average 7%)
- Return On Invested Capital: 29.9% (industry average 24.2%)
Today Altria is working on a $2 billion cost cutting program that it expects will boost its already industry leading operating margins to 45%, highlighting its excellent economies of scale, which is its second big competitive advantage. While Altria’s gross margins aren’t much higher than its rivals, its economies of scale mean its net margin is three times that of its rivals. More importantly the company converts 26% of every dollar in revenue into free cash flow or FCF. FCF is what’s left over after running the business and investing in future growth. It’s what funds Altria’s dividend and pays for buybacks. Meanwhile the company’s above average and very high return on invested capital show that management is very good at allocating shareholder capital efficiently and profitably. ROIC is a good proxy for quality management and Altria’s is among the best in the world at delivering what income investors crave (steadily rising cash flow and dividends).
Thanks to its ability to raise prices at a quick rate, analysts expect Altria’s cigarette revenues to continue to grow about 1% per year over the next decade. Combined with above industry average growth rates in wines, 15% annual sales in vaping products, and modest growth in smokeless tobacco products, that translates into about 2.4% revenue growth expectations. Meanwhile management guidance is for long-term EPS and FCF/share growth of 7% to 9%, resulting from modest sales growth combined with cost cutting and steady buybacks.
This likely means that Altria can continue growing its dividend at its historic rate of 8% (over the last 20 years). Which when combined with one of the highest yields on Wall Street, means investors can likely expect some truly impressive and market beating total returns.