Altria's (MO 3.60%) main business is in decline. Management knows this, and has opted to treat its core cigarette operations as a cash cow, investing a portion of the cash flow generated for the future and passing much of the rest on to shareholders in the form of dividends. The yield is a very high 8.6% -- compared to the 1.6% or so you'd get from an S&P 500 Index fund. Better yet, the dividend has been growing steadily for over a decade. But given the cigarette industry's woes, how long can Altria support a growing dividend?
Is the payout safe?
For dividend investors attracted to the high current yield here, the first question is likely to be about dividend safety. The answer to the question is going to be nuanced, because if you use the standard payout ratio as a gauge of safety you'll probably want to run from Altria stock as fast as you can. The company has been paying out more than 100% of its earnings as dividends for a number of years now.
MO Payout Ratio data by YCharts
The reason it can do this is because, technically, dividends don't come out of earnings. They come out of cash flow. The earnings statement includes many non-cash items, so earnings may not be truly indicative of the cash a company is generating. When you step back and look at the cash dividend payout ratio, which uses distributable cash flow instead of earnings, the payout ratio falls to around 80% and has pretty consistently been below 100%.
MO Cash Dividend Payout Ratio data by YCharts
The end result here is that, given the cash flows Altria is generating, the dividend looks safe -- at least for now. There's added comfort here when you look at the balance sheet, too. Although the company has a material amount of long-term debt at nearly $27 billion, it is covering its trailing interest expenses by around eight times, which is reasonable.
MO Total Long Term Debt (Quarterly) data by YCharts
A business in decline
How about the longer-term future? That's less sanguine: The average dividend increase over the past decade was 8%, but the average dividend increase over the past three years was closer to 4%. Things appear to be slowing down.
NYSE: MO
Key Data Points
But that makes sense. The customer base for the cash cow cigarette business is shrinking, with the declines being offset with price increases. In 2022 the company's results were hindered by "lower net revenues in the smokeable products segment." Essentially, price increases weren't large enough to offset volume declines. That's not a great trend, and it should only get worse, eventually hitting a tipping point where volume declines start to pick up materially.
That's why Altria has been pushing more aggressively into non-cigarette businesses. That includes its oral tobacco products (pouches and chew, for example), which also saw a revenue decline in 2022. The diversification effect also included Altria's investment in vaping company Juul, which it has now basically entirely written off, and cannabis grower Cronos Group (CRON +0.19%), where the stock price has fallen nearly 90% from its 2021 peak. Combined these investments have resulted in billions of dollars of write offs, and thus a terrible use of shareholder capital.
Realizing that there's no real option but to find a new growth engine, however, Altria just recently inked a deal to buy another vaping company, Njoy. Njoy is much further along in its development than Juul was when Altria invested in it, so there's reason to believe that Njoy will work out better. But it's still a $2.75 billion investment (with an additional $500 million in achievement-related payouts), so there is a lot of shareholder money on the line if it doesn't work out as hoped.
Meanwhile, the company's previous move to break into two, splitting out its foreign operations from its domestic business, has started to look like a problem. That's because Philip Morris International (PM +0.63%) is eyeing the U.S. market for expansion opportunities as it looks to shift toward smoke-free products. In other words, Altria appears to have created a competitor.
Not for the long term
When you step back and consider Altria as a dividend stock, investors looking to maximize the income they generate in the near term are probably safe.
However, investors with a long-term horizon should probably be worried about the negative business trends and the investment missteps that have taken place. Both suggest that Altria's ability to pay a huge dividend could be time limited. Essentially, tread with caution -- and perhaps take a "show me" attitude as Altria attempts to buy its way out of its cigarette problems.
