With the U.S. Federal Reserve skewing more dovish and the risks to economic growth still elevated, 2019 is proving to be a year when investing in quality dividend stocks isn’t a bad idea.
In general, dividend stocks rallied strongly in 2019, on signs that the Fed’s next moves will lower borrowing costs. After delivering a quarter percentage point cut in July, the Fed is widely expected to slash rates again at the upcoming Sept. 17-18 meeting.
The central bank's path to lower interest rates means bond yields, which compete directly with dividend paying stocks, won’t be offering attractive returns as yields continue to sink. As such, any short-term capital risk inherent in buying high quality equities that also pay a dividend is offset by the logic of betting on dividend payers that have a history of producing solid income. Altria Group (NYSE:MO) is a high-yielding dividend stock that, we believe, is offering particular value in this falling rate environment:
Attractive Yield; Tough Operating Environment
Altria’s rich 7.68% dividend yield is unquestionably attractive. The parent company of Philip Morris USA, which owns such high-profile brands as Marlboro, Skoal and Nat Sherman, cigarette maker Altria has lost a quarter of its value over the past 12 months as new government regulations and declining adult consumption of traditional tobacco products damaged the company’s growth potential.
With that downward move, however, the company’s dividend yield has become extremely appealing. At 7.68%, its annual yield is much higher than the company’s five-year growth average of 4.21%.
The bearish spell that pressured Altria shares over the past two years, seems to have run its course after news of a potential merger between Philip Morris International (NYSE:PM), which sells Marlboro cigarettes in overseas markets, with Altria was released.
Both companies, which last week confirmed the merger talks, will benefit if the unification materializes, more than 10 years after the tobacco giants split their operations. The biggest advantage that analysts see will come from the unification of the most popular smoking alternative products that both companies have invested in heavily.
Philip Morris has been spending huge sums promoting IQOS, a heat-not-burn product used by millions outside the U.S. Altria, on the other hand, has invested $12.8 billion in e-cigarette upstart Juul Labs Inc. in December, to acquire a major stake in the company which has, in just a short time, captured the biggest share of alternatives to smoking market in the U.S.
Those who favor the deal argue that products stand to benefit from global integration and distribution. As Wells Fargo analyst Bonnie Herzog wrote in a recent note, this move “would make a lot of sense, especially now given Altria’s stake in Juul and IQOS coming to market shortly in the U.S.” He added that the combined company would have a “stronger and more predictable/stable cash flow profile.”
Besides the obvious benefit of this potential merger, Altria is also active in the fast growing cannabis industry. In last December, Altria paid $1.8 billion for a 45% stake in Canadian cannabis company, Cronos Group (NASDAQ:CRON), one of the nation's largest marijuana producers, with a footprint in many countries and increasing production capabilities.
With its existing 10% stake in Anheuser Busch Inbev (NYSE:BUD), the largest beer producer in the world, along with its sizeable positions in both Juul and Cronos, Altria is a good long-term bet, especially when its dividend yield is at a multiyear high.
Over the past decade, Altria has consistently delivered high single-digit percentage hikes to its quarterly payout. The company now pays an $0.84 a share dividend every three months, a sum that has grown every year over the past 49 years.
Bottom Line
High yielding stocks, such as Altria, certainly carry added risks. The tobacco company is facing a more stringent regulatory environment in the U.S., at a time when its tobacco sales are on a perpetual downslide.
That being said, the company is aggressively diversifying its revenue base to meet that challenge. The recent merger initiative with Phillip Morris International will add additional strength to its business. In our view, the timing is right for investors to buy Altria) shares, if they're interested in adding value to their portfolios.