Why Altria Group Inc.'s Dividend Policy Sets It Apart from Reynolds American Inc.

Altria's management maintains a clear dividend policy as a strict percentage of the company's profits. That's the secret formula behind its impressive returns to shareholders for the past several decades.

May 19, 2014 at 5:00PM

Dividends are all the rage these days, and there's good reason for this. The income that shareholders receive from their stocks has made up a huge portion of total stock market returns. In fact, Standard and Poor's states that a full one-third of the stock market's total return from 1926-2012 came from dividends. And, when you include dividend reinvestment, the result is even more striking. Asset management giant BlackRock estimates that reinvested dividends accounted for 90% of all stock market returns throughout history.

Those quarterly checks go a long way in providing investors with reliable returns, which is why so many investors are clamoring for dividends these days. To that end, one of the best areas for hefty dividend payouts is the tobacco sector, thanks to high industry returns on invested capital and low cost structures.

There's perhaps no more prominent dividend payer in the tobacco industry than Altria Group (NYSE:MO). Read on to discover Altria's fantastic dividend track record, and find out what sets Altria's dividend apart from other tobacco companies like Reynolds American (NYSE:RAI).

An enviable history of enriching shareholders
Over the past several decades, Altria has returned a rising stream of dividend payments back to shareholders every year. Despite constant pressures from increasing regulatory and public scrutiny of cigarettes and ongoing litigation risk, Altria has managed to increase its dividend 47 times in the last 44 years. The last time Altria raised its payout was last August, when it provided investors with a 9% pay raise.

Altria has increased its dividend by 8% compounded annually over the past five years. This is comparable to other tobacco companies such as Reynolds American, which has increased its own payout 11 times since it became a public company in 2004. This includes Reynolds American's most recent 6% increase earlier this year.

Like Reynolds American, Altria bumps up its distribution in the high-single digits every year like clockwork. What separates Altria and provides investors an extra dose of certainty is that Altria's management is committed to a clear and transparent dividend program. That provides a solid framework of what to expect in terms of annual hikes in the company's dividend.

A clear and honest dividend policy
To illustrate, Altria's target dividend-payout ratio, which measures the portion of profits the company pays out to investors, is approximately 80% of adjusted earnings. Adjusted earnings are an alternative measure to traditional G.A.A.P. net income that Altria uses, which strips out one-time charges against earnings like litigation expenses. By utilizing this system, it's fairly easy for investors to gauge how strong of a dividend increase might be in store for them. That's because there's inherently less guesswork come the fall, during Altria's usual dividend-increase period.

Altria's adjusted earnings last year clocked in at $2.38 per share. Its current annualized dividend stands at $1.92 per share, which is 80.6% of its adjusted earnings per share. That means that it's right on track.

Going forward, Altria management expects 2014 adjusted earnings to fall between $2.52 per share and $2.59 per share. At the midpoint of its guidance, Altria should generate about $2.55 per share. Assuming it keeps its promise, 80% of its forward adjusted EPS would represent a dividend of approximately $2.04 per share. That means that investors are in line for a roughly 6.5% dividend increase at some point this year.

And, even better, should Altria's adjusted EPS come in at the higher end of its forecast or even slightly above that, investors would be in line for an even greater dividend increase.

Light up impressive returns with Altria
Altria generates strong profits from high returns on invested capital; combined with effective cost controls, it can easily raise its dividend in the high-single-digit range every year. Gradual and reliable dividend increases of this nature might not seem like a formula to get rich on, but it's exactly why Altria's investors have done so well over the past several decades.

Altria's robust dividend payments are supplemented by its share buybacks. Altria is currently authorized to repurchase $1 billion worth of its own shares. And, since Altria's valuation has remained low for many years due to constant litigation risk, those buybacks are even more valuable. A solid dividend and compelling share buybacks combined with a modest valuation make up the formula for Altria's success.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 

Bob Ciura owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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