Becoming a Dividend King takes growth, smart management, and dedication to the dividend. It also takes a long time; an S&P 500 member must raise a dividend for at least 50 consecutive years to earn that honor. Understandably, dividends are often sacred to the companies that raise them yearly; tobacco giant and Dividend King Altria Group (MO 0.40%) pays a dividend that yields 9.3%, the primary reason most shareholders own the stock.
But is it blasphemous to consider the benefits of a Dividend King hanging up its crown and cutting its dividend? Altria's stock has languished since its infamous Juul acquisition -- here is why a dividend cut could be the key to turning the stock around.
Self-inflicted wounds that aren't healing
NYSE: MO
Key Data Points
Altria, which owns the Marlboro brand, shipped 136 billion cigarettes and cigars in 2012 but just 96 billion in 2021. That's a 29% decline; yet you can see below that Altria's making much more profit now compared to back then. The addictive nature of nicotine lets Altria continually raise prices to make up for volume declines, plus some additional growth to fund a dividend raise.
MO Operating Income (TTM) data by YCharts
This is a successful formula, but management has realized the need for a long-term plan beyond cigarettes, which influenced its decision to spend $12.8 billion on a 35% stake in electronic cigarette maker Juul in late 2018. Vaping had become very popular then, and Altria wanted exposure to what it thought was the next big thing. Unfortunately for Altria, legal and regulatory troubles have vaporized Juul and any value in Altria's stake.
Yes, Altria's current cigarette business is still raising profits. Still, the company's expensive swing and miss has doubled its debt, and Wall Street has slashed the stock's valuation now that Altria has far less financial breathing room and a slowly dying legacy business.
MO Total Long Term Debt (Quarterly) data by YCharts
Some may not care because they're happy with Altria's dividend; to be fair, it's enormous, with a 9.3% dividend yield at today's share price. However, the stock is no longer the total returns superstar it once was; shares are up just 10% since the Juul purchase with reinvested dividends and down 18% on price action alone.
Why a dividend cut makes sense
Altria's hands are a bit financially tied; it doesn't have the balance sheet to make an aggressive move to diversify away from cigarettes. It's a cash flow machine but spends about 80% of it on the dividend, about $6.5 billion over the past four quarters.
You can see below that management has spent what's left of its cash profits after paying the dividend on share repurchases, a prudent move because Altria no longer pays a dividend on each share of stock it retires. It's almost like paying down a loan with a 9.3% interest rate. But getting some financial flexibility back might become a priority with rising rates and a continued need for non-cigarette business assets.
MO Total Dividends Paid (TTM) data by YCharts
Hypothetically, Altria could cut its dividend in half, freeing up about $3.26 billion in annual cash profits; four years of paying down debt would wipe out the company's Juul mistake, giving Altria a clean slate financially and potentially a higher valuation from Wall Street. The stock's median price-to-earnings ratio (P/E) over the past decade is just under 18 versus today's P/E of 8.5. The balance sheet is the company's most notable change over the past 10 years, so cleaning up the debt could be great for both the company and investors.
