Altria Group: Buy, Sell, or Hold?

Altria (NYSE: MO) stock has vastly underperformed the market over the last five years. Over that time span, the S&P 500 has risen in value by 104%. Altria shares, meanwhile, added just 43%.

But shares of this tobacco company are cheaper than they've been in years. And the juicy dividend yield is now up to 8.6%. Is now the time to buy this beaten-down value stock?

Altria stock is undeniably cheap

Despite its stock price struggling to match the market's big gains in recent years, Altria remains one of the largest tobacco companies in the world. It owns leading brands including Marlboro, Zyn, Black & Mild, Copenhagen, and Skoal.

While the usage of combustibles like cigarettes is on the decline in the U.S., total tobacco use is still rising due to new smokeless products like Zyn. According to a recent report, Zyn's sales increased from around 20 million pouches per month in the last quarter of 2019 to more than 140 million pouches per month in the first quarter of 2022. By the start of 2023, sales had reportedly surpassed 260 million pouches per month.

Altria's strong brands have allowed it to maintain competitive market shares in the still sizable, but slowly shrinking combustibles market. And while it has had some missteps in the non-combustibles segment -- such as its multibillion-dollar loss in Juul -- Altria has had several big wins. These two factors in combination allowed the company to maintain high levels of free cash flow, which it has used to buy back stock, pay big dividends, and reinvest in new product categories.

Slow-growth defensive stocks like Altria often underperform during strong market rallies like the current one. As an "out of favor" stock, Altria's free-cash-flow yield has risen to more than 11%. Its overall free-cash-flow levels, meanwhile, have been either stable or rising. So while the stock has underperformed the market, the fundamentals have continued to improve, and the cheap valuation has become difficult to ignore.

MO Free Cash Flow Yield

Two types of investors should buy this stock

Despite the cheap valuation and high dividend, investors looking for maximum growth should avoid Altria stock. The overall nicotine market is still growing, but by a paltry 1% per year. That makes Altria more of a value or income play than a growth pick.

Who should be buying Altria stock? If you're looking for big dividends, put this company at the top of your buy list. Its 8.6% dividend is hard to beat. And the underlying financials make this elevated payout fairly reliable.

Those looking to insulate their portfolio from a potential market downturn should also take a closer look. While it's impossible to predict market crashes, there's no denying that stocks in general are fairly pricey right now. The S&P 500, for example, trades at nearly 29 times earnings -- nearly twice its long-term median.

Because nicotine users continue consuming these products regardless of economic conditions, Altria has become a proven safe harbor during times of turmoil. In 2022, for example, when the S&P 500 lost around 18% of its value, Altria shares actually gained roughly 4% in value.

Whether you're a retiree looking for consistent dividend income, or you're simply looking to hedge against market downturns without pulling your money out of stocks entirely, Altria stock is currently a perfect fit for value and income investors alike.

Should you invest $1,000 in Altria Group right now?

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Ryan Vanzo 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.