Dividend Investor Portfolio #34: Smoking Rich
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Dear Investor,
Welcome to the 34th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: November 11, 2024
Stock markets had a stellar week, with the S&P 500 (SPX) rising by 4.66% and the Dow Jones Industrial Average (DJIA) increasing by 4.61%. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) gained 5.74% and 5.41%, respectively.
Last week, two major catalysts of uncertainty were taken off the table, lifting investor spirits. First, a sweeping Trump victory voided fears of a post-election drama, while increasing the odds of corporate tax cuts, looser regulations, and other business-friendly policy changes. Afterward, the Federal Reserve delivered the widely expected 0.25% interest rate cut, easing concerns over continued headwinds to economic activity from high financing costs. In addition, several technology companies reported impressive quarterly results, helping drive the markets higher.
Federal Reserve Chair Jerome Powell reiterated that the central bank’s future policy decisions will continue to be data-dependent, noting that the economy has remained more robust than was expected, while September’s PCE inflation came in above economists’ projections. Powell said that the Fed sees risks to its employment and inflation goals as “roughly in balance,” adding that the economic outlook remains uncertain. Powell gave off the impression that he believes interest rates remain restrictive even after last week’s reduction, and that inflation seems to be on a path toward a 2% target. While the Fed Chair’s mildly dovish comments showed that policymakers expect to perform additional rate cuts in the future, they opened the possibility the Fed might pause these reductions at its next meeting in December.
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This Week’s Quality Dividend Stock Idea
Altria Group, Inc. (MO) is one of the world’s largest producers and sellers of tobacco, cigarettes, and smokeless nicotine products. Altria’s operations are U.S.-focused, although it maintains international interests through significant equity investments in global companies. The company is well-known for its leading brands such as Marlboro, Parliament, and others.
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Expansion and Investments
Altria Group, Inc. has its roots in Philip Morris Companies Inc., which dates back to 1847 when Philip Morris opened a tobacco shop in London. The company’s U.S. division, Philip Morris USA, eventually grew to dominate the American cigarette market, becoming especially well-known for its flagship Marlboro brand, which became a leader in global cigarette sales.
In 1985, the company adopted the name Philip Morris Companies Inc., reflecting its expansion beyond tobacco into other industries, including food, beverage, and financial services. In the 2000s, however, regulatory pressures on tobacco intensified globally, leading the company to realign its structure. In 2003, Philip Morris Companies Inc. was renamed Altria Group, Inc., aiming to create a broader corporate identity separate from its association with tobacco.
This rebranding allowed the company to focus on a diversified strategy, acquiring interests in other industries, including the alcohol sector with a stake in Anheuser-Busch InBev, the largest global brewing company. MO’s investment in AB InBev provides it with substantial income and cash flow, adding a strong asset to its balance sheet.
Altria’s diversification continued through investments in sectors like cannabis, with its stake in Cronos Group, a leading global cannabinoid company headquartered in Toronto, Canada. This investment positions Altria to participate in the emerging global cannabis sector, which is expected to show rapid growth over the next decade. It also creates a new growth opportunity in a category that is adjacent and complementary to MO’s core tobacco businesses.
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Separation and Diversification
To further navigate the complex regulatory environment and shift focus to domestic markets, Altria decided in 2008 to spin off its international operations. This spin-off created Philip Morris International (PM), a Smart Dividend Portfolio holding, as an independent entity, which sells cigarettes and other combustible tobacco products exclusively outside the U.S.
Despite that separation, the two companies’ businesses overlap in some U.S. niches, as PM is expanding its presence in the smoke-free product category, particularly with nicotine pouches and, starting in April 2024, IQOS devices. However, Altria also has an established presence in these categories in the U.S.
Altria retained Philip Morris USA and continued to manage its tobacco products within the U.S. market. Philip Morris USA, the nation’s leading cigarette manufacturer, markets Marlboro, Benson & Hedges, L&M, Parliament, and other leading brands. Despite the brand diversification, Marlboro is the company’s biggest revenue driver, responsible for over 40% of cigarette sales. In addition to cigarettes, Altria owns John Middleton company, a maker of cigars and pipe tobacco.
MO also sells smokeless tobacco products like Copenhagen and Skoal through its subsidiary, U.S. Smokeless Tobacco Company. In addition, the company has invested in the e-vapor market through its acquisition of NJOY Holdings, which offers products like NJOY ACE and NJOY DAILY e-vapor products. In the Heat-Not-Burn market, Altria operates through a Horizon Innovations, a majority-owned joint venture with JT Group, which markets and commercializes JT’s heated tobacco stick products (such as Ploom) in the U.S. MO also owns Helix Innovations, which manages the global portfolio of on!® nicotine pouches.
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Transformation Through Strength
Altria Group holds a market capitalization of almost $92 billion; its annual revenues of $20.5 billion secure it a #196 rank in the Fortune 500 list. The company maintains a solid financial position, reflected in its debt levels, credit ratings, and key financial metrics.
Altria’s total debt stands at approximately $14.7 billion, following recent financial activities, including a $300 million note redemption. Its debt is rated “A3” by Moody’s and “BBB” by S&P and Fitch. Fitch recently affirmed the company’s high rating, saying that it is supported by MO’s #1 position in the U.S. cigarette market and leading positions in oral tobacco products.
According to the agency, the Marlboro brand is an invaluable asset for the company, commanding almost 60% of the premium cigarette segment in the U.S. In total, Altria’s combustible product portfolio captures about half of the market for cigarettes, cigars, and tobacco. This business segment generates the majority of MO’s cash flows. The company’s strong market position ensures significant pricing power, particularly in premium cigarette brands, allowing it to compensate for lower tobacco volumes with consistent price increases.
Fitch has praised Altria’s investment in its non-nicotine businesses, as this enhances Altria’s financial flexibility, enabling its further portfolio reshaping within the company’s target of bringing its U.S. smoke-free net revenue to 20% of total net sales. This is especially important as overall tobacco sales have been in decline over the past five years. This secular decline trend is expected to accelerate, with various alternatives – from e-cigarettes to nicotine pouches – replacing traditional smoking products. Altria acknowledges the likelihood for a smoke free future, which is the driving force behind its powerful entry into various non-combustible product markets.
Even after the latest repayment, MO’s debt is still high, especially compared to equity which has been reduced primarily due to substantial share repurchases and dividend distributions. However, other financial metrics and the company’s overall operational performance point at robust financial health, characterized by strong profitability and efficient asset utilization. Thus, its ROA surpasses almost all its peers, while its ROIC is in the top 25% of the global Tobacco industry. Altria’s gross, operating, FCF, and net profit margins are in the top 10% of the industry.
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High Dividend Yield and Continued Growth
Altria’s strong market position, financial robustness, and the ability to generate ample cash flows support its dividend policy, reflecting its commitment to providing consistent shareholder returns. The company has a longstanding history of dividend payments, with records indicating consistent distributions dating back to 1972.
Over the years, Altria has established itself as a reliable dividend payer, achieving the status of a Dividend King by increasing its dividend for 54 consecutive years. Moreover, MO states that strong and consistently growing dividends are its top priority. To provide investors with confidence in consistent dividend growth, Altria has established a new progressive dividend goal that targets mid-single digits dividend per share growth annually.
Altria’s current dividend yield stands at 7.35%, almost triple the average for the Consumer Staples sector and the second-highest among the global tobacco companies (after British American Tobacco, which lags MO in terms of dividend safety and growth). Altria’s payouts have grown at an annual rate of ~4.5% over the past five years and are expected to continue growing at about the same rate for years to come.
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Total Return in Focus
In addition to dividends, Altria actively engages in stock buybacks to return value to its shareholders. In March 2024, the company expanded its existing share repurchase program by $2.4 billion, bringing the total authorization to $3.4 billion. By the end of the third quarter of 2024, MO had repurchased $3.1 billion worth of shares and anticipates completing these remaining purchases under the authorized program by December 31, 2024.
Altria’s shares have risen by ~35% in the past 12 months, broadly in line with the performance of the S&P 500 index and slightly less than most of its comparable global peers. However, relatively modest stock gains have kept MO’s valuations at bay, with its current and forward PE ratios offering significant discounts versus the average for the Consumer Staples sector. Altria’s current PE comes at the bottom of the price scale for comparable peers in the industry. Moreover, based on its future cash flows, the company’s shares appear to be undervalued by about 55%. The moderate valuations create attractive conditions for entry, specifically for long-term income investors.
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Investing Takeaway
Altria Group is a major player in the U.S. tobacco industry, known for its dependable dividend policy and substantial share repurchase initiatives. With a strong cash flow supporting its high dividend yield and consistent buybacks, Altria is committed to returning value to shareholders. The company’s diversified investments in smokeless products, nicotine pouches, and heated tobacco solutions position it well for future growth while aligning with evolving consumer preferences. Notably, Altria’s stock is currently trading at attractive valuations. Combined with a long track record of steady dividend increases and resilient earnings, its low multiples enhance its attractiveness for value-oriented investors seeking both income and potential capital appreciation.
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Dividend Investor Portfolio
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Portfolio News
¤ Qualcomm (QCOM) announced results for its fiscal fourth quarter and year ending September 29, 2024, surpassing expectations on all accounts. For the quarter, the chipmaker reported 19% year-over-year revenue growth and a surge in EPS of over 33%. Revenue across all segments soared during the quarter, with the most notable sales growth registered in QCOM’s automotive division. For the full fiscal year, Qualcomm reported that its total revenue grew by 9%, while its EPS increased by 21%. In addition, the company guided for higher-than-expected revenue and EPS in the ongoing quarter and approved a new $15 billion stock repurchase authorization.
¤ EOG Resources (EOG) reported a stable financial performance in Q3, despite challenges in the energy sector. The company’s top and bottom-line results surpassed analyst estimates. Following the strong quarterly outcome, EOG increased its dividend by over 7%, and approved an expansion of its stock buyback authorization by $5 billion.
¤ Automatic Data Processing (ADP) hiked its dividend by 10%, the company’s 50th consecutive annual payout increase.
¤ BlackRock (BLK) is said to be in early talks to purchase a minority stake in Millennium Management, one of the largest hedge funds globally. The $70 billion multi-strategy fund has previously never sold a stake to a third party. BlackRock, the world’s biggest asset manager, is aggressively expanding into alternative assets, which typically charge higher fees, boosting revenue and profits. Moreover, BLK is looking to transform itself into a one-stop shop for stocks, bonds and private strategies, facilitating investor access to various types of investments.
¤ JPMorgan Chase (JPM) notched yet another record this past week amid a strong rally in financial stocks. Donald Trump’s victory is seen as positive for banks and other financial companies, as they now expect less strict oversight and a lighter regulatory oversight of M&A approvals. In other company news, JPM’s CEO Jamie Dimon said he doesn’t intend to leave his role at the bank to join President-elect Donald Trump’s administration.
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Recent Trades
We are happy to announce a new addition to our Portfolio. We are adding IBM, which we recommended in our Newsletter on February 2nd.
The International Business Machines Corporation (IBM), aka Big Blue, is an American multinational technology company. It specializes in producing and selling computer hardware, middleware, and software, and offers consulting services. IBM is known for its mainframe computers, AI-powered Watson platform, and contributions to cloud computing and quantum computing.
Founded in 1911, IBM in many ways originated the IT industry, which didn’t exist before the company began delivering its groundbreaking innovations. These included the ATM, RAM, magnetic storage technology, Fortran and SQL, the UPC barcode, the PC, networking protocols, and more. IBM helped to launch the first Apollo mission to the Moon, while its “thinking machine” Deep Blue was the first step towards today’s Artificial Intelligence (AI) technology. The company holds a U.S. record for the most patents generated by a single business.
Today, with a market cap of nearly $198 billion and annual revenues of $62 billion, IBM ranks #63 on the Fortune 500 list of the largest U.S. firms. It operates in 175 countries, serving clients across various industries. The company’s customers include 95% of the Fortune 500 firms. The company’s stock has been traded on the NYSE since 1916, making it the second-longest listed technology stock after General Electric.
Despite its lingering perception as a research powerhouse with weak business capabilities, IBM has been rapidly modernizing its business. After spinning off its legacy business of managed infrastructure services, IBM has been focusing on higher-margin, faster-growing areas. Today, software (particularly hybrid cloud platforms) and consulting account for 75% of total revenues, with over half being recurring. This lends IBM’s revenue streams high predictability and stability. To position itself for growth, IBM has acquired numerous firms in hybrid cloud, IT automation, and data analytics.
AI is another significant growth area for IBM. Its comprehensive AI suite offers AI-as-a-Service, enabling businesses to develop, deploy, and manage AI models, make scalable data-driven decisions across any cloud, and monitor AI projects seamlessly. IBM’s tightly integrated ecosystem of platforms, software, and consulting services enables its clients to transform business operations effectively.
IBM’s extensive partnerships with major public cloud providers and SaaS leaders, including AWS, Adobe, Cisco, Microsoft, Oracle, Salesforce, SAP, and Meta, have further strengthened its offerings. IBM’s recent integration of Meta’s Llama 2 AI model enhances its platform’s AI capabilities. These partnerships not only help IBM avoid direct competition with other major cloud providers but also drive growing consulting revenues.
Beyond its role as an IT powerhouse, IBM occupies a central stage in global financial transactions and telecommunications. The company’s mainframe computers, IBM Z, handle approximately 87% of all credit card transactions worldwide, as almost all leading banks around the world use these machines. Incredibly, IBM’s machines are responsible for providing half of all wireless connections in the world. In every way, the company’s computer systems serve as one of the pillars supporting the global economy.
The strategic emphasis on AI and cloud services has been a catalyst for IBM’s resurgence, reflected in its financial performance in the recent quarters. Thus, the company succeeded in transitioning from stagnating or even declining revenues in the past decade to strong growth in the past three years. Over that period, its earnings-per-share growth also regained altitude. In Q3 2024, IBM confirmed its return to growth, producing solid results and issuing positive guidance for revenue growth in its key focus areas, software and AI.
IBM’s aggressive push into high-growth areas is expected to further lift its already strong profitability and capital efficiency metrics and expand its enviable margins. The company’s strong financial performance, coupled with its solid finances and bright outlook, add to IBM’s attractiveness as a dividend stock.
IBM began paying dividends over a century ago in 1916. The firm is a Dividend Aristocrat, featuring 29 years of consistent annual payout increases. Its current dividend yield stands at 3.12%, well above the IT sector’s average. With an extremely long dividend-payment history and a track record of constant payout increases for almost three decades, IBM stands out as one of the most reliable dividend payers in the Information Technology sector.
In the past decade, the dividend has grown at a CAGR of ~5%, slowing down to 1-2% annual growth in recent years. Given its industry-high payout, IBM is expected to grow its dividend at a similar rate over the next couple of years. However, as Big Blue’s business turnaround is ongoing, the expected upside from the AI-powered cloud business is projected to further support earnings growth, which in turn may lead to the return of faster dividend-growth rates.
The company’s stock returned over 43% in the past year, outperforming the S&P 500. However, it came down from its all-time high in October, with TTM and forward multiples reflecting a slight discount to Tech sector averages once more. While its current PE places it at mid-scale for comparable peers, its future cash flows suggest that IBM is undervalued by about 30%.
Given IBM’s cornerstone position in the global economy, as well as its long and stable dividend track record, improving revenue growth, expanding free cash flow, and undervalued stock price, we view it as a compelling addition to our Smart Dividend Portfolio.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.84% | +9.45% | $4,976.56 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Dec 06, 2024 | Jan 01, 2025 | 2.24% | $5.60 |
| Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
| Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 3.09% | $9.00 |
| BlackRock (BLK) | Dec 08, 2024 | Dec 23, 2024 | 2.56% | $20.40 |
| Edison International (EIX) | Dec 27, 2024 | Jan 31, 2025 | 4.82% | $3.12 |
| EOG Resources (EOG) | Dec 13, 2024 | Dec 30, 2024 | 3.95% | $3.64 |
| IBM (IBM) | Nov 12, 2024 | Dec 10, 2024 | 3.13% | $6.68 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.86% | $5.00 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.82% | $1.28 |
| LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Dec 20, 2024 | Jan 10, 2025 | 6.06% | $5.40 |
| Qualcomm (QCOM) | Nov 29, 2024 | Dec 13, 2024 | 2.25% | $3.40 |
| VICI Properties (VICI) | Dec 20, 2024 | Jan 04, 2025 | 5.19% | $1.72 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
