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Better Dividend Stock -- Altria vs. British American Tobacco

By Adam Brownlee - May 9, 2019 at 7:39PM

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Stocks with juicy yields can lead to great cash flows for investors. Which of these tobacco giants is the dividend winner?

For investors seeking additional sources of income, stocks with good dividend payments can be a boon. If the companies are solid, the investment is even more enticing. Altria (MO 1.13%) and British American Tobacco (BTI -0.64%) are two such names with high yields. But are these yields that investors can count on?

Let's compare Altria and BTI on a handful of dividend-related measures to see which one is the better dividend stock pick.

Current yield

A robust yield means more cash flow for the dividend investor. In this case, BTI is the clear winner. Altria has a yield of 5.9%, compared with a yield of around 6.9% for the maker of Pall Malls. In part, these yields are a result of headwinds at a much broader level. First, consumers are switching from traditional smokes to lower risk products, such as electronic cigarettes and heat-not-burn devices. As a result, Altria's cigarette shipments fell by 5.8% and BTI's combined deliveries of cigarettes and heated tobacco products dropped by 3.5% last year.  

Image of e-cigarettes

Image Source: British American Tobacco

Secondly, the FDA is pursuing a ban on menthol cigarettes in the United States. This ban would be a huge blow to BTI, as menthols represented around 55% of their U.S. cigarette sales last year. However, the legality of this move is being questioned. For Altria, these smokes represented only 20% of total sales last year. Finally, a growing number of states are raising the smoking age to 21.

As a result of these pressures, Altria's share price is down 29% over the last couple of years and BTI is down 47%. In this case, the drops have led to juicy yields.

Payout ratio

Can the companies continue to pay their dividends? To answer this we look to the payout ratio, which is simply a measure of how much of a company's earnings it pays out as dividends. If the company is using most or all of its earnings to pay dividends, then the payout might not be sustainable, since businesses need to retain a part of earnings to maintain the business and invest for future growth.

Altria is the big loser by this measure because it is paying out about 95% of its earnings in dividends. Think of it this way: the company only has a nickel of wiggle room for every dollar that it earns. If things turn out poorly for MO, then it might have to cut its dividend. Also, the company has seen paltry revenue growth of less than 1% over the past five years and a huge decline in earnings over the last year. This high payout has not always been the case for Altria though. In 2017 and 2018 the company had payouts of 31% and 51%. What is the reason for the jump? Earnings in 2018 dropped by 31% due to the absence of tax benefits and AB Inbev purchase gains the company realized in 2017. 

BTI, on the other hand, has a payout ratio of about 77%,  which appears to be more sustainable. The Lucky Strike maker reported healthy revenue growth of 10% over the last five years. This bolsters the company's ability to continue paying its dividend.

Recent dividend increases

Despite slowing revenue and an earnings drop, Altria recently raised its quarterly dividend from $0.70 to $0.80 a share. This increase was a 14% lift and leads to an annual dividend of $3.20 per share.  This is great news for investors who want to see growth in their dividend payments, although it goes against the grain of declining earnings and helps to partly explain the large payout.

BTI on the other hand, only raised its annual dividend to $2.70 per share last February.  This increase was a mere lift of 4% over the company's previous quarterly dividend which led to an annual dividend of $2.66 per share. 

Long-term dividend growth

If we pull back and take a look at the broader picture for dividend growth, we find huge differences between Altria and British American Tobacco.

Altria has boosted its payout annually for the past 10 years, and over the past decade, it has grown its dividend by 83%.  BTI's has also raised its dividend over the last 10 years and it has grown it by 85% over the last decade.    

When it comes to long-term dividend growth, both stocks appear evenly matched.

Final analysis

Ultimately, although Altria had a much larger lift in its dividend recently, BTI has a juicier yield of 7% and it has more wiggle room to provide coverage. Both stocks have a good history of dividend growth, but in the end, BTI is the winner of this dividend title fight.   

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
$54.50 (1.13%) $0.61
British American Tobacco p.l.c. Stock Quote
British American Tobacco p.l.c.
$44.79 (-0.64%) $0.29

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