6-9% Yielding Dividend Growers: 1 To Avoid And 3 To Buy

Altria stock (MO) is on a tear right now, significantly outperforming the S&P 500 (SPY) and high-yield space (SPYD) over the past two weeks:

The reason for this soaring share price is due to several positive catalysts converging:

1. The company recently announced solid Q4 results and guidance along with a major share buyback plan. For a stock where sentiment was quite low, this was very welcome news for the market.
2. MO also is selling a substantial amount of its Anheuser-Busch InBev (BUD) stake, which was a non-core stake for the company.
3. Last, but not least, MO is using the proceeds from its BUD sale to accelerate its share buyback program from $1 billion to $3.4 billion which is expected to be completed by year-end.

With that being said, I think that the latest run-up in the stock price is enough to make me not want any part of the stock. In this article, I will share why and then share a few alternative high-yield picks that I think are much more attractive right now.

Why I’m Avoiding MO Stock Right Now

The primary challenge facing MO right now is the declining volumes in its core smokable products business segment as consumer preferences shift away from these cancer-causing products and toward healthier alternatives such as vaping and heated tobacco.

While management is investing aggressively in trying to replace these lost volumes with growth in adjacent businesses, ultimately it’s spending heavily to replace wide moat and highly profitable revenue with narrow to no moat and less profitable revenue. Moreover, its success in these new areas has been spotty at best thus far as intense competition from smaller companies has limited MO’s market share gains and profit margins. Moreover, it wasted significant shareholder value on its ill-fated Juul investment.

Meanwhile, it continues to drive bottom line growth by raising prices on its gradually shrinking Marlboro products business and buying back stock. While its recent BUD stake sell-down is unlocking liquidity for management to use to buy back stock, once this stake is sold off, a major source of MO’s liquidity will be gone. Meanwhile, its Marlboro business volumes will very likely be even smaller, further squeezing the company’s profits and shortening its timeline to successfully diversify outside of its core business segment.

What this ultimately means is that MO is merely buying additional time by selling down its BUD stake, but until it achieves a major breakthrough in its diversification efforts, the company will continue to face an uncertain long-term growth outlook and its dividend will eventually come under pressure.

With so many much better high-yield opportunities available right now, there’s just not enough behind the MO investment thesis to make me want to buy this stock and I see little that indicates it will reverse its significant underperformance of the high-yield space over the past five years:

What I’m Buying Instead

What are some of these much better opportunities? Here are three blue chips that I think are much more attractive right now:

1. Enterprise Products Partners (EPD): Midstream energy infrastructure blue chip EPD boasts a stellar (and sector-best) balance sheet, a very defensive business model that has consistently delivered double-digit returns on invested capital, its very well-covered 7.2% distribution yield, and its ~5% per unit distribution CAGR. Moreover, unlike MO, EPD has a very large growth investment backlog that should last for years to come, giving it a much clearer growth runway while still generating a very substantial current yield.
2. Enbridge (ENB): The ENB investment thesis is very similar to EPD’s given that it operates in the same industry, has the second-best credit rating in its sector, an even more defensive business model than EPD’s due to its significant regulated utility exposure, and it offers an even more attractive 7.5% dividend yield that’s also very well covered by distributable cash flow. It also has a similarly strong per-share growth and dividend growth outlook and has arguably even more attractive growth prospects than EPD has given its significant exposure to the midstream, natural gas utilities, and renewable power generation segments.
3. Brookfield Renewable Partners (BEP)(BEPC): Last, but not least, renewable power generation company BEP offers investors the combination of very stable, defensive cash flows from its highly contracted asset base (consisting of primarily hydro, solar, wind, and nuclear power related assets), a 9%-plus per unit cash flow CAGR due to its strong organic growth profile and prolific capital recycling program, a 6.5% distribution yield, strong mid-single-digit distribution CAGR, sector-best credit rating, and the backing of one of the world’s elite asset managers in Brookfield (BN)(BAM). As a result, it offers investors a vastly more compelling growth profile while paying out a distribution that is just 230 basis points lower than MO’s. Given that BEP is growing rapidly and MO is effectively a melting ice cube, the comparison seems quite lopsided in our view.

Investor Takeaway

MO has an impressive dividend growth track record, offers investors an attractive dividend yield and the stock has finally caught fire as management is making moves to accelerate buybacks by liquidating a non-core investment. While MO is not overvalued in our view, its lack of exciting growth potential makes it nothing more than a stagnant high-yielding stalwart. The 8.8% dividend yield is effectively the total return that investors can expect, with possibly a 1%-2% additional return if the company can manage to continue squeezing a bit of bottom-line growth for the foreseeable future through buybacks, price hikes, and growth investments.

While that’s not a bad investment, it does not excite us as total return-focused high-yield investors. Instead, we think that stocks like EPD, ENB, and BEP offer much more compelling combinations of yield plus growth alongside relatively low business and balance sheet risk. As a result, we’re avoiding MO and investing in options like the others that we discussed instead.

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