Dividend Report Card: Altria

In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Altria (NYSE: MO  ) , which posts a 6.3% yield.

Dividend history

Metric

3-Year Annualized Growth Rate

Dividend per share

31%

Source: Company presentation.

Normally, we use a company's trailing five-year dividend-per-share growth rate to score this section, but due to Altria's spin-offs of Kraft in 2007 and Philip Morris International in 2008, an organic five-year dividend growth rate is difficult to ascertain.

In any case, there shouldn't be much question that Altria's dividend history is impressive. In the past year alone, for example, it's increased its dividend twice. What's more, that's on the back of 42 increases in a 40-year period ended 2009. It's very clear that Altria has been good to dividend investors.

Nevertheless, past returns don't guarantee future results, so dividend history is only 10% of the final grade. Altria does, however, score a 5 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

5.7 times

10%

4

EPS payout ratio

75.8%

10%

4

FCFE payout ratio

70.9%

30%

4

Source: Capital IQ, a division of Standard & Poor's, as of Feb. 8.

Altria currently yields nearly three and a half times the S&P 500 average of 1.9% -- no, that's not a typo. As such, dividend sustainability is of utmost importance for someone currently invested or considering an investment in Altria.

Based on these metrics, the current dividend appears sufficiently covered by Altria's relatively consistent free cash flow generation.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

75.8%

10%

2

FCFE payout ratio

70.9%

20%

3

Sustainable growth rate

20.3%

10%

5

Dividend growth potential, while always important to consider, is not as critical when analyzing a high-yield stock like Altria. As long as it can grow at a rate above inflation, it's a fair trade-off.

Over the next few years, there seems to be a good chance of mid-single-digit dividend growth given analyst expectations for 7.5% earnings growth and Altria's target payout ratio of 80%.

The real question is "How long might the growth continue?" Recently, a Citigroup analyst suggested that smoking could "virtually disappear" in developed markets by 2050. Investors in Altria need to ask themselves if they might be investing in a business that could be in steady decline.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

Reynolds American (NYSE: RAI  )

6.1%

6.0%

Lorillard (NYSE: LO  )

6.0%

6.0%

British American Tobacco (NYSE: BTI  )

4.2%

9.7%

With its current yield at 6.3%, Altria's dividend is slightly above the peer group average, but is by no means an outlier.

Pencils down!
With all the numbers in, here's how Altria's dividend scored:

Weighting

Category

Final Grade

10%

History

5

 

Sustainability

 

10%

Interest Coverage

4

10%

EPS Payout Ratio

4

30%

FCFE Payout Ratio

4

 

Growth

 

10%

EPS Payout Ratio

2

20%

FCFE Payout Ratio

3

10%

Sustainable growth

5

100%

Total Score (out of 5)

3.8

 

Final Grade

B

For a share yielding 6.3%, a grade of "B" is very good, especially since it scored well in the "sustainability" categories. Still, Altria isn't without its risks, so investors would be wise to do some extra due diligence before putting money to work.

Want some more dividend ideas? Click here for a free report from Motley Fool expert analysts: "13 High-Yielding Stocks to Buy Today."

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He owns shares of Philip Morris International. Philip Morris International is a Motley Fool Global Gains selection. The Fool owns shares of Altria and Philip Morris International and has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2011, at 4:46 PM, financeguy85 wrote:

    First let me state that I am a huge fan of the Dividend Report Card series. However, giving Altria a grade of B is an odd call. The only reason to own Altria is for the dividend. Altria is quite simply the greatest dividend stock of all time. That's like writing a Basketball Report Card and giving Michael Jordan a B.

  • Report this Comment On February 08, 2011, at 7:36 PM, longertime01 wrote:

    Fools got some of the best articles about MO. MO rocks!

  • Report this Comment On February 09, 2011, at 10:18 AM, longertime01 wrote:

    If any one could find a better deal than Altria, please let me know. I will look at it seriously.

  • Report this Comment On February 09, 2011, at 1:04 PM, jflogel wrote:

    Great article Todd. I'm going to try to track down that Citi analysts' comments because I find that interesting (perhaps you could point us in the right direction?). I'd really like to know what it's based on because based on what I see on the streets of any country in the world is a lot of people who have no intention of quitting smoking. I have a colleague who just went through chemo for breast cancer and she smokes several times a day! People are addicted to them and they think it's cool. Those are very powerful forces! While general smoking rates in the U.S. are on the decline, MO has also demonstrated its ability to maintain revenue simply by raising prices and also by diversifying such as buying the Chateau St. Michelle winery (another consumption unlikely to disappear anytime soon!).

    I'm also going to use these tools to analyze the other dividend stock for which I have a significant position.

    financeguy85, the author is grading MO on it's future potential, while you seem to be relying on its past performance, a practice cautioned against by almost any respectable investment performance report with something like "Past performance does not guarantee future returns." I could be wrong about your analysis, but the author provided a couple pages' worth of analysis to back up his position while you didn't give us anything for yours. Maybe you could provide a follow-up post that elaborates on your original one.

  • Report this Comment On February 09, 2011, at 4:49 PM, financeguy85 wrote:

    jflogel, while it is wise to caution against relying on the past, we have to understand that what made Altria a great past investment is the same thing that makes it a great current and future investment: the growing dividend. The management team has stated their intention to keep the dividend payout ratio around 85 percent of earnings. Even with smoking on the decline, with cost cuts and new product lines (wine, smokeless tobacco) you can bank on 8-10 percent annual dividend raises. Combine that with a current yield of 6-7 percent and you'll get to 100 percent yield on cost in no time.

    This isn't some tech company that has to reinvent the wheel to stay profitable. This is tobacco. A cigarette 50 years ago probably looked a lot like a cigarette you'll find today. Buy Altria, re-invest the dividend, and in 20 years you'll be pretty pleased.

  • Report this Comment On February 09, 2011, at 7:27 PM, longertime01 wrote:

    financeguy85, you are right on the money. Ha ha, if you use your ira to buy the stock and re-invest the dividends in the stock. You don't even need to worry about the tax. And that bets the question. Why invest in anything else?

    In my opinion, it's even better than ko, nke, pm becauses it's a named brand without the need paying the high multiples. Trading at 12.x, what a great deal.

  • Report this Comment On February 10, 2011, at 4:31 PM, dbisc1 wrote:

    Someone tell me who comes close to MO, even for half those years? This company was the largest federal tax payer, 60% of the items in your basket at the store was from a Phillip Morris American Co. Forced to leave this country with its jobs due to crooked government. If your looking for dividends and consistency look at the godfather.

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