Altria Pays a Big Dividend… but is it Safe?

by Rob Otman
Old_Man_Smoking

Altria Group (NYSE: MO) shares have dropped 25% this year due to disappointing sales growth, regulation, and management changes. As a result, the Altria dividend yield has climbed back towards its 10-year average. Altria now pays about a 6% yield but the important question, is the dividend safe? To answer this, let’s look at the business and dividend trends…

Altria Dividend Supported by a Big Business

Altria Group is a $102 billion business that operates out of Richmond, Virginia. Altria employs 8,300 people and makes about $2.3 million per employee in sales. That works out to $19 billion in total sales.

Altria is a tobacco company that has a credit rating of A- from the S&P. This allows Altria to issue low-interest rate debt to build its business and pay dividends.

One way Altria has recently built its business is by investing $1.8 billion in Cronos Stock. Cronos operates in the medical marijuana space and if the U.S. legalizes marijuana on the federal level, Altria will profit big on marijuana. This potential revenue will help support Altria’s growing dividend payouts.

Altria Dividend History and Trends

Altria paid investors a $1.68 per share dividend a decade ago. And over the last 10 years, the dividend has climbed to $2.54. You can see the increases below...

Altria Dividend Per Share 10-Year History

The compound annual growth is 4.2% over 10 years… but over the last year; Altria’s dividend climbed 8.1%. That’s solid growth for an income investment. Let’s review the yield…

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Altria’s Current Dividend Yield vs. 10-Year Average

Altria’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield an indicator of value. A higher yield is generally better for buyers. Dividend safety is also crucial, and we'll look at that soon.

The Altria dividend yield comes in at 5.87% and that's below the 10-year average of 6.66%. The chart below shows the dividend yield over the last 10 years...

Altria Dividend Yield 10-Year History

The dividend yield has dropped most of the last 10 years but is slowly climbing again. The dividend trend has reversed.

Is the Altria Dividend Safe?

Many investors look at dividend payout ratio to figure out dividend safety. They look at the dividend per share divided by the net income per share. And a payout ratio of 60% would mean that for every $1 Altria earns, it pays investors $0.60.

The dividend payout ratio is a good indicator of dividend safety… but accountants manipulate net income. They adjust for goodwill and other non-cash items. A more useful metric is free cash flow.

Here's the Altria dividend payout ratio based on free cash flow over the last 10 years...

Altria Dividend Payout Ratio 10-Year History

The ratio is volatile over the last 10 years and the trend is up. The last reported year shows a dividend payout ratio of 103.3% and that’s concerning. Altria's board of directors doesn’t have any room to raise the dividend sustainably.

Although the Altria dividend yield is big, you might want to look for better dividend stocks in the current market.

If you’re interested in seeing more dividend research, please comment below. You can also check out our free and powerful dividend calculator.

Good investing,

Robert

IU Stock Grader