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 5.9% yield. When we looked at Altria in February, it scored a respectable "B." Let's see how it scores six months on.

Dividend history

Metric

3-Year Annualized Growth Rate

Dividend per share

9.4%

Source: Altria investor relations.

Normally, we use a company's trailing-five-year dividend-per-share growth rate to score this section, but due to Altria's spinoffs 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 2010, for example, it increased its dividend twice. What's more, that's on the back of 43 consecutive years of dividend boosts.

Nevertheless, past returns don't guarantee future results, so dividend history is only 10% of the final grade. Altria scores a 4 of 5 in this category because its three-year record is slightly below the 10% growth threshold.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

5.7 times

10%

4

EPS payout ratio

90.7%

10%

3

FCFE payout ratio

66.6%

30%

4

Source: Capital IQ, a division of Standard & Poor's, as of Aug. 18.

Altria currently yields nearly three times the S&P 500 average of 2.1% -- 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 and solid balance sheet (Morningstar gives Altria a "BBB" credit rating).

On the other hand, the earnings payout ratio has ticked above the company's target of 80%, so investors should keep an eye on that metric in future quarters.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

90.7%

10%

2

FCFE payout ratio

66.6%

20%

3

Sustainable growth rate

6.9%

10%

3

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 Altria's wide economic moat, stable margins, and ability to raise prices. With U.S. inflation expected to run at 1.83% over the next decade, Altria stands a good chance at delivering real dividend growth to its shareholders.

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  )

6.0%

8.0%

Lorillard (NYSE: LO  )

4.9%

9.2%

British American Tobacco (NYSE: BTI  )

4.2%

10.9%

With its current yield at 5.9% and analysts expecting 8% growth, Altria's dividend seems in line with its peer group.

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

Weighting

Category

Final Grade

10%

History

4

 

Sustainability

 

10%

Interest Coverage

4

10%

EPS Payout Ratio

3

30%

FCFE Payout Ratio

4

 

Growth

 

10%

EPS Payout Ratio

2

20%

FCFE Payout Ratio

3

10%

Sustainable growth

3

100%

Total Score (out of 5)

3.4

 

Final Grade

B-

Even though its score has fallen slightly over the past six months, Altria investors shouldn't fret too much. For a stock yielding 5.9%, a grade of "B-" is still very good and Altria's dividend looks quite sustainable.

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 does not own shares of any company mentioned. Motley Fool newsletter services have recommended Philip Morris International. Motley Fool Options has recommended a bear put ladder strategy on Lorillard. The Fool owns shares of Altria and Philip Morris International and has a disclosure policy.


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