Investors looking for stocks with long histories of dividend growth should take a closer look at the Dividend Kings. These represent the stock with the longest streaks of annual dividend increases. The Dividend Kings have each raised their dividends for at least 50 consecutive years.

To be a Dividend King, a company must have a strong business model with competitive advantages, along with the ability to navigate recessions. It should be no surprise that we consider the Dividend Kings to be among the highest-quality dividend stocks in the entire stock market.

Altria (MO) recently increased its dividend by 2.4%, representing its 55th dividend increase in the past 51 years. Altria enjoys numerous competitive advantages, and the company is performing quite well in 2020, even in a challenging environment. With a high dividend yield of 9%, we view Altria stock attractively for value and income investors.

Business Overview

Altria sells cigarettes, chewing tobacco, cigars, e-cigarettes, and wine under the Marlboro, Skoal, Copenhagen, and St. Michelle brands, among others. The company also has a 10% equity stake in Anheuser-Busch InBev (BUD), a 35% stake in e-cigarette maker JUUL, and a 45% stake in the marijuana company Cronos Group (CRON). Altria has a market capitalization of $72 billion, which makes it a large-cap stock.

Smokeable tobacco products still comprise the vast majority of Altria’s revenue and profit. Over the past several decades, this has served the company (and its shareholders) extremely well. Altria has increased its dividend for 51 years in a row. While high dividend yields are routine among tobacco stocks, no company has as long of a dividend increase streak as Altria. Related: The 6 Best Tobacco Stocks Now, Ranked In Order

On July 28th, Altria reported financial results for the 2020 second quarter. Revenue of $5.06 billion fell 2.5% year-over-year, slightly beating expectations by $20 million. Altria’s core fundamentals have held up relatively well over the first half of 2020, despite the coronavirus pandemic which has had a significant impact on the U.S. economy.

Source: Earnings Presentation

In the most recent quarter, Altria’s smokeable product volume (which refers to the core cigarette brands) declined 8.7% year-over-year, a full percentage point better than expectations. Smokeless product volume dropped 1%, far better than the 2.7% drop that was anticipated.

Adjusted earnings-per-share came to $1.09, beating estimates which called for $1.06 per share. Adjusted EPS increased 1% year-over-year, thanks to the benefits of cost controls and share repurchases.

For 2020, Altria expects its adjusted diluted EPS to be in a range of $4.21 to $4.38, compared with $4.21 generated in 2019.  Altria’s adjusted EPS could rise as much as 4% in 2020. All in all, the business environment remains fairly strong for Altria, as the company expects at least flat earnings-per-share in 2020 with the possibility of some growth.

Growth Prospects

As a major tobacco company, Altria has to deal with the reality of declining smoking rates in the United States. Historically, tobacco manufacturers have compensated for falling smoking volumes with pricing increases. This has been a successful tactic to offset lost revenue, and Altria will continue to raise prices in the years to come.

But ultimately, tobacco companies must adapt to the new environment, and Altria is preparing for a post-cigarette world by investing heavily in the development of noncombustible products.

Source: Investor Presentation

Altria has invested heavily in non-combustible products, such as its $13 billion investment in e-cigarette leader JUUL and its $1.8 billion investment in Cronos. E-vapor and cannabis could be two major long-term growth catalysts going forward.

Altria also invested $372 million to acquire an 80% ownership stake in Swiss tobacco company, Burger Söhne Group, to commercialize its on! oral nicotine pouches. Oral tobacco is a growth area for Altria, as consumers who have quit smoking increasingly shift to oral tobacco products. In the 2020 first half, Altria’s operating income from oral tobacco products increased 10.5% compared with the first six months of 2019.

Finally, Altria is aggressively expanding its own e-cigarette brand IQOS. In July, IQOS received approval from the FDA to be marketed as a modified-risk tobacco product.

This growth will help Altria to continue increasing revenue in the years ahead, even as smoking rates keep falling. The company will also be able to generate earnings-per-share growth through cost reductions and share repurchases. In all, we expect 3% compound annual growth in Altria’s earnings-per-share over the next five years.

Competitive Advantages & Recession Performance

Altria benefits from a number of competitive advantages, which have allowed the company to generate its steady growth over so many years. First and foremost, Altria has tremendous brand loyalty. Retail market share for the flagship Marlboro cigarette brand has remained over 40% for many years. This affords the company the ability to raise prices every year and not lose customers.

Source: Investor Presentation

Second, tobacco manufacturers operate an advantageous business model, which does not require intensive capital outlays. Tobacco is not a capital-intensive business, thanks to economies of scale in production and distribution. This is why Altria generates strong free cash flow each year, even as revenue has stagnated from falling smoking rates.

For example, in 2019 Altria generated operating cash flow of $7.84 billion, while needing just $246 million for capital expenditures during the year. The company generated free cash flow of approximately $7.59 billion, leaving plenty of cash available for shareholder cash returns, debt repayment, and investment in future growth initiatives.

Another benefit of Altria’s business model is that it is highly resistant to recessions. Cigarettes and alcohol sales hold up very well during recessions, which keep Altria’s profitability and dividend growth intact. The company performed strongly during the previous major economic downturn, the Great Recession of 2008-2009:

• 2008 earnings-per-share: $1.66
• 2009 earnings-per-share: $1.76
• 2010 earnings-per-share: $1.87

As you can see, Altria grew its adjusted earnings-per-share in each year of the Great Recession. This demonstrates the company’s ability to produce steady earnings growth, even when the broader economic environment becomes more challenging.

Given Altria’s own exposure to cigarettes and now, e-cigarette products, in addition to its sizable investment stake in AB-InBev, it should hold up very well during the next downturn.

Valuation & Expected Returns

Based on expected 2020 earnings-per-share of $4.31, Altria stock trades for a price-to-earnings ratio of 8.9, compared with our fair value estimate of 11.0. As a result, Altria stock appears to be undervalued, which could result in positive returns from an expanding valuation multiple. If Altria’s P/E ratio rises from 8.9 to 11 over the next five years, shareholder returns would be boosted by 4.3% per year over the next five years.

In addition, we expect 3% annual earnings-per-share growth through 2025, comprised of revenue growth and share repurchases, which will further boost shareholder returns.

Lastly, Altria has a high dividend yield of 9%, making the stock extremely attractive for investors who focus primarily on income. The dividend appears to be safe, as the company maintains a target payout ratio of 80% of its annual adjusted earnings-per-share.

Taken together, Altria stock has total expected returns above 16% per year over the next five years. With a high expected rate of return above 10% per year, we rate Altria stock a buy.

Final Thoughts

When it comes to dividend stocks, Altria is about as steady as they come. It has increased its dividend each year for over five decades, a highly impressive performance. The company faces uncertainty due to the continued decline in smoking rates, but Altria has planned for the changing consumer landscape by investing in new products such as heated tobacco, e-vapor, and cannabis. These adjacent categories will fuel continued growth for years to come.

Altria stock also appears to be undervalued, meaning right now is an opportune time to buy shares. The high dividend yield of 9% is secure. Overall, the stock seems very attractive for value and income investors.