A stock with an annual dividend yield approaching 10% will get investors’ attention. But when the company’s primary product is cigarettes, a good number of those investors will tune out.
The gradual exit of investors has largely been the story for Altria Group, Inc. (NYSE: MO) in recent years. So much so that some might wonder if the high-dividend stock is becoming oversold and due a bounce.
Altria owns Marlboro, the best-known and most profitable brand of cigarettes in the US. Marlboro held a commanding 42.5% market share in the US cigarette market in 2022, but the market size has seen a marked decline for years. While Altria has continued to bank profits by raising the price of cigarettes regularly, smokers willingness to pay may be approaching a ceiling.
Declining revenues haven’t stopped the company from paying a hefty dividend, and Altria has raised it over 50 times. The current annual dividend yield now stands at 9.67%. While the dividend doesn’t appear to be in immediate jeopardy, the fact that sales are diminishing has many concerned about how long the company can keep up the pace.
So is Altria Group’s dividend safe?
Is Altria a Good Long-term Stock?
Altria’s future prospects hinge on the company’s ability to turn around its revenue decline.
In the 3rd quarter of 2023, Altria reported net revenue of $6.28 million, a 4.1% decrease from the same quarter of last year. In 2021, cigarette sales dropped by approximately 7.5%, followed by a near 10% decline in 2022.
That declining trend is a primary reason why the stock has taken a hit over the past few years. MO reached a peak above $75 in 2017, but it’s been all downhill from there. Altria stock is down over 36% over the past 5 years, and that includes an 11% drop year-to-date.
But while revenue has dropped, profits have increased. Net income of $2.17 billion was light years above where the company came in last year. That’s due to the increased price of cigarettes, but the trend may have limited runway, making Altria a risky long-term play in spite of the healthy dividend.
Is Altria in Debt?
Despite the steady sales declines, Altria has actually managed to reduce its debt.
Liabilities of almost $24 billion represented a roughly 3.5% decrease year-over-year. That’s a continuation of a long-term trend, as the company’s debt decreased by over 6.5% from 2021 to 2022.
Though some might view increasing profits and decreasing debt as signs of strength, the company isn’t out of danger. The continued slowdown in revenues could well mean that Altria may have to take on debt to keep operations afloat in future years.
Can Altria Maintain Its Dividend?
The main draw for MO investors is its dividend, a risky reason to invest alone. Theoretically, Altria could reduce or even eliminate it at any time, but the Board of Directors understands that the dividend is what gives MO stock its allure.
In light of the fact that the company is still increasing profits, it seems likely that Altria will continue its dividend payments in the near future. The payout ratio of 76% would appear to confirm that too.
Lessening or eliminating the dividend would cause an immediate decline in MO stock price, so Altria has good reason to maintain it. Currently, the company pays out a quarterly dividend of $0.98 per share.
Altria just raised its dividend, now up from $0.94 last quarter, a trend the company has followed for decades. But is there a breaking point where declining sales will force Altria to reduce its quarterly payout?
Is There A Downside to Dividend Stocks?
If there is one major drawback to dividend stocks, it’s that at the company’s discretion the dividend can be cut.
But there are other downsides. Dividend stocks carry the same risk that any stock does, moving up and down with the whims of the market.
Investors who buy a stock solely thinking about the dividend payout could still lose out if the stock underperforms. MO has dropped 36% over the past 5 years, far below the S&P 500’s nearly 58% increase over the same time period. Certainly, the company’s high dividend has helped to alleviate the disparity but the key for investors is to focus on total return, not just the yield.
How Safe Is Altria Stock?
Given the uncertainty around the company and its dividend, investors who are enticed by the dividend yield should exercise a healthy degree of skepticism about the longevity of the dividend stream. In fact, even near-term, analysts are split on what to expect from the stock over the next 12 months.
Out of 15 analysts who have offered research ratings on the stock, most are still holding at this price point. The median forecast projects MO stock price increasing by around 10% over the coming year to $45.
There are 7 Buy ratings on the stock, however, and 2 of those analysts believe MO can outperform the market next year. The highest prediction has the stock reaching $70, a 72.5% increase from where it trades now.
There are three Sell ratings on the stock currently, with one of those analysts predicting the stock will drop by 8.8% over the next 52 weeks to $37.
Will Altria Raise Its Dividend In 2023?
The analysts’ consensus of a 10% gain, if it comes to fruition, coupled with a nearly 10% dividend (9.67% at last count), may attract some investors. The company’s continual devotion to its dividend means that Altria is likely to raise its dividend again soon, if not in 2023 then in the early part of 2024.
The question is whether it will be enough to offset the stock’s decline and be able to sustain it if sales take a steeper drop. All in all, there’s considerable risk that comes from investing in MO, which is one of the reasons the company has paid such a high dividend.
There is the distinct possibility that the stock drops further and the dividend is either reduced or halted entirely, so Altria buyers should watch their investment closely.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.