Altria Group (NYSE:MO), one of the oldest companies in America, also pays out one of the largest dividends. Shares of the tobacco maker yield 8.3% at Monday’s prices, which should entice investors looking for stocks that pay out a steady stream of income. However, plenty of smart investors are worried that because of historic headwinds with tobacco use, Altria’s dividend is too good to be true.
While many stocks with yields close to 10% can end up being a trap for income-seeking investors, I don’t think that will be the case with Altria Group. Here’s why.
Tobacco is a centuries-old, stable industry
Altria Group in its current form can be traced back to 2008, when it spun off Philip Morris International (NYSE:PM). However, its roots as a tobacco maker trace back to 1902 and the incorporation of Philip Morris & Co., Ltd. Philip Morris USA (the main subsidiary under Altria Group), with its Marlboro cigarettes, has been an industry giant for much of the last 120 years.
Tobacco use in the U.S. has been declining for decades, ever since the surgeon general issued a warning on smoking and health in 1964. In fact, since the report came out, cigarette use by adults in the U.S. has dropped by two-thirds to 13.7%. But during this timespan, Altria Group has grown its earnings power tremendously.
How is this possible? Two words: pricing