Is Altria’s Dividend Still Safe?
Income investors seek a steady stream of dividends. Altria’s dividend history is long and steady, but it could now be in jeopardy. With the FDA responding to vaping related fatalities, Altria’s stock has been beaten down. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
Altria (NYSE: MO) is a $77 billion business. The company is based out of Richmond, Virginia and it employs 8,300 thousand people. Last year Altria pulled in $20 billion in sales and that works out to $2.4 million per employee.
The company operates within the consumer sector and maintains a solid credit rating (BBB) from the S&P. This allows Altria to issue cheap debt to expand operations and pay dividends.
Altria was once the darling of dividend investors, but many are deeply concerned about Altria’s long-term sustainability. In 2017 the FDA delivered a directive to lower nicotine levels in cigarettes and Altria’s stock has been trending down ever since. Altria responded by betting its future on JUUL Labs with a $12.8 billion (35%) stake. Now JUUL is under scrutiny from the FDA and President Trump following the tragic vaping related deaths in the headlines.
Altria has weathered storms before, but this time could be different. The company’s biggest strength has always been its strong balance sheet, but by paying a fortune for JUUL, Altria’s long-term debt has soared.
Despite the turmoil, on August 22 Altria raised its dividend from $0.80 to $0.84. The dividend will be made payable October 10 to shareholders of record on September 16.
Altria’s Dividend History
The company paid investors $1.32 per share a decade ago. Over the last 10 years, the dividend has climbed to $3.00. That’s a 127% increase and you can see the annual changes below…
The compound annual growth is 8.6% over 10 years… but over the last year, the dividend climbed 18.1%. The increase in dividend growth is a good sign. But the question remains whether Altria can continue to increase its dividend at this rate. We’ll dig into that but first, let’s take a look at the yield…
Current Yield vs. 10-Year Average
Altria’s long history of paying dividends makes it very popular among dividend investors. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital and we’ll look at that soon.
The dividend yield comes in at 8.15% and that’s above the 10-year average of 6.6%. The chart below shows the dividend yield over the last 10 years…
The higher yield shows that investors have bid down the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that every $1 Altria earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety… but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Altria’s payout ratio based on free cash flow over the last 10 years…
The ratio is volatile over the last 10 years and the trend is down. The last year shows a payout ratio of 69.4%. This gives wiggle room for Altria’s board of directors to raise the dividend.
Altria’s struggles stemming from JUUL and the FDA could be partially offset by the company’s investment in Cronos Group (NASDAQ: CRON). Cronos provides Altria exposure to the growing marijuana industry. Cronos has its hand in a deal to develop and commercially scale cannabis products that could provide a huge revenue boost.
With the FDA breathing down its neck, Altria is certainly in hot water. But if you dig a little deeper, and notice the Cronos partnership, it appears Altria has the potential to recover. Sometimes the best advice is “don’t be scared by volatility.” Only time can tell if Altria can keep its steady dividend.
For more information on dividend paying companies, check out our Dividend Stocks page. There is a wealth of information about the latest and greatest in the dividend investing world. Now you know about Altria’s, but what about PepsiCo’s dividend?