Will Altria Group Inc. Raise Its Dividend in 2017?

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Cigarette giant Altria Group (MO 1.45%) has delivered spectacular performance to shareholders over time, and dividend investors appreciate just how much its quarterly payouts have contributed toward its overall returns. Earlier today, as I predicted back in June, Altria once again rewarded shareholders for their loyalty to the tobacco stock, raising its dividend for the 50th time in 47 years. Yet some investors have wondered how Altria has been so successful in continuing to provide more income to investors even as the overall tobacco industry faces challenges that threaten its future existence. Below, we'll take a closer look at how Altria has been able to make the most of its opportunity in tobacco while also looking at other potential sources of revenue.

Dividend stats on Altria Group

Data source: Yahoo! Finance. Last increase refers to dividend announcement. *Takes into account adjustments for spinoffs.

The secret of Altria Group's dividend success

Dividend investors appreciate the stability of Altria's dividend and the way in which it predictably increases its payout year in and year out. The company's recent 8% boost took the quarterly dividend up to $0.61 per share, and it marks a continuation of the pattern that has given shareholders annual increases of around 6% to 10% for most of the past decade.

Longer-term, Altria's dividend growth has also been impressive, but the fact that the company has spun off various holdings and divisions into separately traded companies has skewed Altria's track record. As a result, longer-term charts of Altria dividends are misleading, showing what appear to be major cuts that happen to correspond with decisions to break up the conglomerate into two or more pieces. When you account for those spinoffs, Altria's most recent boost brings its streak of annual dividend increases to 47 years.

Altria's recent dividend history

Data source: Altria Investor Relations.

Altria has produced the earnings growth to support these dividend increases. Even though trends in the cigarette sector have been toward fewer people smoking, Altria has used pricing power to raise what it receives per pack sold to a great enough extent to offset the gradual decline in volume. The most recent increase in its dividend pushes Altria's earnings payout ratio up to 85%, which is fairly high historically for the company. However, with expectations for ongoing earnings growth, Altria investors expect that earnings for the rest of 2016 will rise sufficiently to bring the payout ratio back down toward the 75% to 80% range in which it has historically stayed.

What's ahead for Altria's dividend?

Altria executives have made it very clear that dividends are a top priority. After the company released its second-quarter financial report, CFO Billy Gifford once again reminded investors that when it comes to considering how to allocate capital, dividends come first. The company's official 80% dividend target payout ratio has become a cornerstone of Altria's strategy, and it's one that shareholders have come to rely on as a benchmark for future dividend increases.

In addition, Altria will find itself in an unusual position in the near future. The deal between SABMiller and Anheuser-Busch InBev has continued to progress, and as long as it receives final approval, Altria anticipates that it will receive close to $3 billion in cash as part of the merger. That's up from previous estimates of $2.5 billion, largely because of AB InBev's revised offer. The tobacco giant hasn't committed to a specific course of action, but one possibility would be to return some capital through a special dividend payment.

All in all, it's likely that Altria will give investors another dividend boost this time next year. A $0.05-per-share raise to $0.66 quarterly would be consistent with past practice, and as long as Altria's fundamental business prospects remain sound, income investors are likely to see even higher payments in the years to come.