The stock market has been far more volatile since the start of 2025 than in the past two years. Investors are grappling with a dynamic market environment rife with drama from issues ranging from tariffs to wars. During times like this, investors often shy away from riskier investments.
This flight to safety is evident in defensive consumer staples stocks like tobacco giant Altria Group(NYSE: MO), which has done very well recently. Shares are up over 30% over the past 12 months (not including dividends), easily outpacing the S&P 500.
Is it too late to buy Altria stock in 2025? Or is this Dividend King poised to continue higher?
The dividend is secure, but less spectacular than before
As a Dividend King, Altria, the company most known for selling Marlboro cigarettes and other tobacco and nicotine products in the United States, is a legendary dividend stock. Altria boasts an active streak of 55 consecutive annual dividend increases.
Altria has yielded 6.25% on average over the past decade. Typically, such a high dividend yield is a red flag. It's a sign that the market sees risk in the business, so the stock trades at a lower share price. Remember, a company only declares the dividend amount it pays. The yield results from the stock's share price on the open market.
However, tobacco stocks, such as Altria, are different. The tobacco industry is heavily regulated in the United States. New competitors are rare, and laws prohibit most ads for nicotine products. Altria is highly profitable, but since its core business doesn't require much investment, it sends most of its cash to shareholders as dividends. Today, Altria's dividend remains well-funded by profits, with a dividend payout ratio of approximately 77% of 2025 earnings estimates.
In recent years, investors have had the opportunity to routinely buy shares at 6% to almost 10% yields. That's like receiving the stock market's average annual returns from the dividend alone! Altria's dividend is still quite generous today, but the share price momentum has knocked the dividend yield down to about 6.9%. That's still good for a dividend with strong financial backing, but it's not as much for new buyers as before.
Altria's core business could face challenges over the next five years
Altria could become increasingly risky over the next five years and beyond. Smoking rates in the United States have declined for generations, which Altria has countered with steady price hikes. This has worked because there weren't any appealing alternatives for smokers.
That's beginning to change. Electronic cigarettes (vapes), oral nicotine pouches, and heated tobacco devices have become popular. For example, electronic cigarettes have become almost as popular in the U.S. as combustible cigarettes. Unfortunately, regulators have struggled to police the market, and illicit vapes have grown to 60% market share. Altria must jump through regulatory hoops for any product it wants to sell, so competing with the black market is tough.
Altria sells various products in these emerging categories, but they don't have the dominant market leadership that Marlboro enjoyed for all these years. Even now, Altria depends on cigarette sales. Combustible products contributed over 90% of the company's operating income last year.
The company must diversify away from combustible products sooner rather than later. Otherwise, it risks earnings collapsing once price hikes can no longer compensate for falling sales volumes. Don't worry -- there is still time. Altria's dividend is well-covered by earnings, and the company's balance sheet includes $3.1 million in cash and a multi-billion-dollar stake in Anheuser-Busch InBev. It's something long-term investors should monitor.
Is Altria stock a buy in 2025?
Income-focused investors can consider Altria a buy. The 6.9% yield is still higher than most stocks', and you can still depend on the dividend until the financials say otherwise.
Those wanting dividend income and share price appreciation must watch Altria's valuation closely. Altria isn't a fast-growing company, with analysts anticipating just 3.5% annualized earnings growth over the next three to five years. Even after its rally, shares still trade under 11 times 2025 earnings estimates. Yet, it's still a fair price-to-earnings (P/E) ratio for a business growing 3% to 4% with a reliable high-yield dividend.
The stock probably won't go up another 30% in 2025, but investors could reasonably expect annualized total returns of 10% to 11%. It's enough to justify buying the stock in 2025.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
