Up 127% on Altria Group, Inc., with More Upside to Come
January 17, 2018
Earn Exciting Returns in Boring Stocks
Today’s chart highlights a theme we repeat over and over: “you can make exciting returns in boring stocks.”
Longtime readers know we gawk over “dull” companies. People always need simple products like soda, coffee, and pet food. While these firms don’t get mentioned much at social events, they earn steady business–which means reliable income for investors.
For proof, take a look at Altria Group, Inc. (NYSE:MO). You probably recognize some of the company’s brands like “Player’s,” “Marlboro,” and “Virginia Slims.” Whatever views you have on tobacco, Altria sells a product people buy every day.
Cigarettes represent a cash cow business.
They cost pennies to make, you sell them for a buck, and they’re addictive. Plus people tend to stick to the same brand year after year.
Most of those profits go straight to the bottom line. Because smoking rates haven’t grown in years, you don’t need to invest in new factories or equipment. And with a ban on marketing, any new competitors would have a tough time breaking into the business.
For owners, this has created quite the income stream.
The company has delivered 51 distribution hikes over the past 48 years. If it were not for a number of corporate spin-offs, Altria would have a spot on the elite list of “dividend aristocrats.”
Today, Altria pays out nearly 90% of its free cash flow as dividends. This has resulted in one of the highest yields around at 3.8%. And because management can easily raise prices, executives project profits (and by rough extension, the distribution) to grow at a high single-digit clip for years to come.
This formula has made shareholders a fortune.
In early 2014, we recommended the stock in our Automated Income newsletter. Since then, Altria has delivered a total return of 127%. And that’s including dividends.
Over the same period, the company has increased its quarterly distribution from $0.48 to $0.66. If you had bought the stock at the start of this time frame, the yield on your original investment would top 8.3% today.
Source: StockCharts.com
Dull businesses don’t need to constantly innovate to bring in sales. They just keep making the same products and paying out dividends to owners. Moreover, no new gadget will likely replace burgers, coffee, and cleaning supplies anytime soon.
And as we’ve seen in the case of Altria, boring stocks can deliver exciting returns.
