Many investors believe that the key to exceptional wealth creation is finding the next great growth stock.

In reality, some of the best investments are the most boring, dividend growth focused companies. There are numerous reasons to be a dividend growth investor (see them all here).

Altria (MO), for example, has been the single best performing stock of the last half century.

As seen below, Altria’s annualized return has more than doubled the S&P 500’s return since 1968.

Company Absolute Increase 1968-2016 Total Return (CAGR)
Altria 6,648 Fold 20.6%
S&P 500 87 Fold 10.0%

What’s even more surprising is that Altria has managed to maintain this level of outperformance during more recent times, when its tobacco products have come under increasing fire from the federal and state governments.

Since August 1995, MO stock has returned 3,551% compared to the S&P 500’s return of 476%.

Altria Group Inc (MO)

Source: DividendChannel.com

Let’s take a closer look at Altria’s business model to see why the company has proven such an effective long-term wealth creator for shareholders.

More importantly, find out whether or not Altria remains a long-term buy today or whether this legendary dividend aristocrat’s best days are behind it (learn about all of the dividend aristocrats here).

Business Description

Founded in 1919 in Richmond, Virginia, Altria is America’s largest tobacco company. The company split into three separate businesses in 2007 (Altria, Phillip Morris International, and Kraft), with Altria retaining all domestic tobacco operations.

The business sells cigarettes (under the Marlboro and Middleton brands), cigars (Black and Mild), smokeless tobacco (NuMark, MarkTen, Skoal, Copenhagen, and Green Smoke), wines (Chateau Ste. Michelle, Columbia Crest, 14 Hands, and Stag’s Leap Wine Cellars), and finance leasing services.

Altria also owns 10.2% of soon-to-be SAB Miller / Anheuser-Busch Inbev (BUD), the world’s largest beer company.

By far the company’s biggest business remains smokeable products, especially cigarettes, which accounted for 90.5% of operating income in 2015.

Business Segment 2015 Sales 2015 Operating Income % Of Sales % Of Operating Income
Smokeable Products $22.8 billion $7.6 billion 89.6% 90.5%
Smokeless Products $1.9 billion $1.1 billion 7.4% 13.3%
Wines $692 million $152 million 2.7% 1.8%
Other $71 million -$468 million 0.3% -5.6%
Total $25.4 billion $8.4 billion 100% 100%

Source: 2015 Annual Report

Business Analysis

It is no secret that smoking is in a secular decline. As the chart below shows, 16.8% of U.S. adults smoked cigarettes in 2014, down from more than 40% in 1965.

Altria Group Inc (MO)

Source: CDC

However, Altria has managed to do an exceptional job of maintaining steady sales and growing earnings and free cash flow (FCF) over time.

Note that due to the spin offs of numerous businesses including Kraft, Miller, and Philip Morris International, Altria’s existing business track record begins in 2009.

Altria Group Inc (MO)

Source: Simply Safe Dividends

Altria Group Inc (MO)

Source: Simply Safe Dividends

Altria Group Inc (MO)

Source: Simply Safe Dividends

Even more impressive is how well management has squeezed out cost savings, improving margins and returns on shareholder capital in recent years.

Altria Group Inc (MO)

Source: Simply Safe Dividends

Altria Group Inc (MO)

Source: Simply Safe Dividends

What is the key to the company’s success? Simply put, when it comes to smokeable and smokeless tobacco in America, Altria is the undisputed king.

For example, Marlboro has been the largest-selling cigarette brand in the country for the past 40 years. Its market share is greater than the next 10 largest brands combined.

Altria Group Inc (MO)

Source: Altria Investor Presentation

In fact, Altria’s market share in both U.S. cigarettes and smokeless tobacco is above 50%, thanks to the strongest brands in the industry. The company’s supply chain, distribution system, and marketing network are unmatched.

Altria Group Inc (MO)

Source: Altria Earnings Release

Altria Group Inc (MO)

Source: Altria Earnings Release

High market share and strong brand recognition allow Altria impressive pricing power, which helps to offset the long-term steady declines in volumes it’s facing from a decrease in overall tobacco use.

For example, in the most recent quarter, Marlboro and Copenhagen were able to command 29% and 26% premium prices to their rival’s products, respectively. This is very important to Altria because over the next decade analysts expect cigarette volume to decline by 3% to 4% a year.

Fortunately, the cigarette industry’s price elasticity has ranged from -0.3 to -0.4 over time, which means that consumption declines by 3-4% for every 10% increase in price.

Pricing is also helped by the tobacco industry’s ongoing consolidation, with British American Tobacco offering to acquire Reynolds for $47 billion in October 2016. There are even rumors that Altria could reunite with Phillip Morris after a series of legal wins have improved the U.S. market’s appeal.

The strong brand equity of Marlboro should allow Altria to completely offset the volume declines via higher pricing and keep overall cigarette revenue stable, perhaps even growing a little.

Better yet, because tobacco isn’t a cash intensive industry, Altria’s cost cutting efforts over the years have allowed it to increase its all-important FCF margin from 18.8% to about 26%.

Meanwhile, smokeless tobacco and wine, though representing a small portion of overall sales, continue to be growth leaders for the company, with revenues rising 10% and 9.3%, respectively, in the past quarter.

All told, the combination of the company’s growth products and ongoing cost cutting efforts should allow organic growth of 2% to 3%, with earnings growth in the 7% to 9% range over the long-term (on par with management’s guidance).

Key Risks

Without a doubt, the biggest risks facing Altria is its exclusive focus on the U.S. (Philip Morris International (PM) has all foreign sales rights).

The problem for Altria remains not so much litigation threats anymore, but increasingly stringent regulations. Specifically, the FDA has now gained full authority to regulate all tobacco (and vaping) products in the US.

This poses a significant threat to Altria’s ability to continue to find growth opportunities, as well as maintain market share and premium pricing power. For example, it recently began rolling out menthol flavored Marlboro, which has been met with much success.

However, the FDA has been threatening for years to ban menthol cigarettes, arguing that the more pleasant flavor makes people more likely to try or continue smoking.

Even more dangerous is the risk that plain packaging laws might come to the US.

Altria Group Inc (MO)

Source: VOX

These are laws that require minimal brand labeling of cigarette packages, forcing gruesome pictographic warning labels taking center stage. Australia was the first nation to impose such regulations, and it has resulted in smoking rates falling significantly in the past three years.

If the FDA requires such packaging in the U.S., then there’s a risk that Marlboro would lose its brand appeal and decrease Altria’s ability to offset declining volumes with stronger prices.

Speaking of limited pricing power, we can’t forget the ongoing risk of ever rising tobacco taxes. For example, on Nov

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