Is Altria’s Dividend Worth It?

The first thing dividend hunters focus on is a company’s dividend yield. The track record of maintaining or increasing dividends, regardless of business ups and downs, is another key factor. One stock appearing at the top of the list of stocks meeting these two criteria is Altria Group, Inc. (NYSE:MO). 

Altria is the holding company for various business divisions that produce primarily tobacco products and is popular for its top-selling and signature brands, Black & Mild cigars, Copenhagen, and of course, Marlboro.

It is not only a popular choice among tobacco consumers but is preferred by income investors because of the extraordinarily high dividend yield it offers. Raising its dividends for more than 50 consecutive years, the company has earned dividend king status.

Altria also rewards shareholders through share repurchases. In FY23, Altria paid shareholders a combined and remarkable $7.78 billion in dividend payments and share repurchases.

However, the tobacco industry is experiencing a consistent decline as rising health concerns and regulatory restrictions dampen sales. It’s reasonable, therefore, to be skeptical about Altria’s aggressive dividend payments, particularly given the high payout ratio of 77.6%. 

The trend among smokers has declined too, which in turn should raise red flags among shareholders. For example,    according to The World Health Organization (WHO), the number of tobacco users has steadily declined since the year 2000.

In 2022, 20% of adults worldwide were tobacco users, down from 33.3% in 2000. This rate is expected to further reduce to 25% by 2025. 

Altria Survives Industry Headwinds?

Altria’s top line, in its fourth quarter results, revealed a 2.2% year-over-year decline, reaching $5.98 billion, as a result of the lower net revenues generated in its smokeable products segment, that was partially offset by net revenue growth in the oral tobacco products segment.

Sales of smokeable products fell by 3.3% versus the year prior to $5.27 billion in the quarter. Due to an industry-wide slowdown, the smokeable products segment’s shipment volume fell by 7.6%.

Oral tobacco products made up some of the shortfall by posting a 6.7% gain for the year to $674 million, though this growth was mainly driven by higher pricing.

When compared to the previous year, the company’s bottom line declined by 23.4% to $2.06 billion. Nonetheless, adjusted earnings per share remained unchanged year-over-year.

As of December 31, 2023, Altria’s liquidity remained strong with cash and cash equivalents standing at $3.69 billion, albeit a decline of 8.5% from $4.03 billion as of December 31, 2022.

Management expects adjusted earnings per share to be between $5 and $5.15 for the coming year, translating to a rate of increase between 1% and 4% from $4.95 in FY23. The company guided capital expenditures between $175 to $225 million.

On a concerning note for shareholders given the trend toward fewer smokers, the company’s smokeable products segment generated the majority, roughly 88%, of its revenue. 

Can Smoke-Free Segment Be a Game Changer? 

In FY23, Altria generated $2.70 billion in revenues from its smoke-free segment and $165 million from innovative smoke-free products. 

In a strategic move to boost its smoke-free portfolio, Altria acquired e-cigarette leader NJOY Holdings, Inc. for approximately $2.75 billion.

Management’s fiscal year 2028 goals for its smoke-free portfolio include a 35% increase in its U.S. smoke-free volumes from 2022.

Furthermore, management plans to approximately double smoke-free net revenue to $5 billion, with $2 billion coming from innovative smoke-free products. While the company is far from covering its revenue declines through increases in smoke-free revenues, the initiatives and projections do look promising.  

Is Altria’s Dividend at Risk?

Altria pays shareholders $3.92 per share annually, translating to a 9.3% yield.

Over the last three years, it increased dividends at an annualized rate of 4.3% and history has shown a steady and reliable history of doing so also.

With that said, the company’s high payout ratio means it can spend just about 20% of its earnings on business improvements. That’s a concern because clearly Altria’s revenues are primarily derived from a market that is shrinking in size.

It’s likely that a more robust investment plan and substantial strategic shift is required to sustain the high free cash flows that have been generated historically, and came in at $3.1 billion in the last quarter alone.

To offset further revenue declines, management may well need to allocate more capital to turning the direction of business towards more attractive opportunities long-term but that in turn poses a risk to the dividend payments that may need to be sacrificed as capital is allocated towards new investments.

With management forecasting a hike in dividends over the next four years, a cut is unlikely in the near term, however.

Is Altria’s Dividend Worth It?

If management forecasts prove correct, Altria’s dividend is worth it and safe over the next 4 years but thereafter the high payout ratio may pose a threat to sustainability.

When it comes to price performance, Altria’s shares have underperformed the broader market so far this year and indeed over the past year.

In spite of the correction, Wall Street analysts are not optimistic about its recovery at this stage. Of the 12 analysts providing ratings on Altria, only 4 consider the stock to be a Buy while 7 analysts favor holding the stock. 

Due to the price decline, the company’s market capitalization has shrunk significantly, making it look cheaper on a forward non-GAAP price-to-earnings basis, where it trades at an 8.3x multiple.

However, it still looks expensive in terms of forward price-to-sales, trading at a 3.51x multiple. Both metrics are lower than their 5-year averages, though.

So, while the high dividend yield is enticing, capital destruction is a very real threat and may very well offset the dividend yield entirely over the long-term.

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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.