Tobacco companies in the U.S. enjoy a tremendously profitable business model. Tobacco firms enjoy “wide economic moats” a term used frequently by legendary investor Warren Buffett to describe a margin of safety inherent in a company’s business model or technology, which helps prevent a competitor firm from easily stealing market share.
Tobacco manufacturers also benefit from vast economies of scale and maintain superb distribution. This provides for low capital spending requirements from year to year. As a result, tobacco companies like Altria (MO ) generate huge amounts of free cash flow. This cash flows through to investors via a high dividend yield and significant stock buybacks each year.
Altria is one of the most famous dividend stocks of all time. It has increased its dividend 49 times in the past 46 years. And, its steady earnings growth has richly rewarded investors. According to the company, Altria delivered total shareholder return of 230% from 2010 to 2014, far outpacing the S&P 500 Index in that time. The past year has been another profitable one for Altria shareholders. Dividend.com discusses Altria’s dividend.