A top dividend growth stock with a high yield can be an excellent asset to hold in your investing portfolio. You can collect a good dividend today, and it's possible that the payouts will rise in the years ahead, potentially offsetting some or all of the effects of inflation.
Altria Group (MO 0.85%) has increased its dividend 58 times in the past 54 years and has generally been one of the most stable dividend stocks to own. And today, the yield is an incredible 9.2%. But the company's future remains hazy, with the tobacco business being in decline.
Is the company's high-yielding dividend safe? Is this a stock that investors should add to their portfolios?
NYSE: MO
Key Data Points
Is Altria's bottom line strong enough to support its quarterly dividend?
One way for investors to assess the safety of a dividend is by looking at the stock's payout ratio, which divides the company's annual dividend payout by its earnings per share (EPS) to arrive at a percentage indicating the size of the payout with respect to profits. The lower the percentage, the better, as it means that the company is paying out a smaller share of earnings as dividends.
Since earnings can fluctuate from one period to the next, it's helpful to consider multiple periods. During the first three quarters of 2023, Altria's EPS has totaled $3.40, which averages out to a quarterly EPS of $1.13. The company's quarterly dividend was $0.98, which means that Altria's payout ratio based on earnings in that period was approximately 87%.
This payout ratio does suggest Altria's dividend is sustainable and that it can continue to pay its dividend, but there also isn't a strong buffer. Another way for investors to assess a dividend is by looking at the company's free cash flow.
Is Altria's free cash flow sufficient to cover the dividend?
Unlike EPS and net income, free cash flow doesn't include non-cash expenses such as amortization and depreciation. For this reason, it can be a more helpful figure in determining how sustainable a dividend is. Free cash flow is how much cash the company is generating after factoring in its capital expenditures.
Altria spends close to $1.7 billion every quarter on its dividend. And in three of the past four quarters, it has generated free cash flow of at least $2.5 billion. This again suggests that the dividend is sustainable as. Over the past four quarters, its payout ratio based on free cash flow is 79%. It's a decent buffer but not a huge one.
The chart below shows how much of free cash Altria has left over after deducting its quarterly dividend. And while generally this is positive, there have been periods in the past where this total has been negative. Free cash is something that investors should monitor going forward.
Fundamental Chart data by YCharts.
The future is a question
Altria's dividend is safe today, but circumstances shouldn't leave investors with a strong sense of security. The company still needs to find a way to grow its business as it transitions beyond smoking. The problem is that there isn't a clear path to what that might look like. There have been health concerns about vaping products, for instance, which suggest that may not be the best alternative.
When you also factor in that there's an ongoing decline in the number of smokers, there's a real danger Altria's top and bottom lines may come under more pressure.
MO Revenue (Quarterly YOY Growth) data by YCharts.
Should you invest in Altria?
Altria's dividend yield does look attractive, but with uncertainty in the business over the long term, this is not a risk-free investment. The yield is sustainable today, but investors should always focus on what lies ahead. And unless Altria can find a way to generate long-term growth, the dividend could be in danger down the road.
At the very least, investors need to monitor the stock regularly to see how its earnings are doing. Simply having a long streak of paying and increasing dividends is not a guarantee that the payout will remain intact. Unless you are willing to take on risk and are also comfortable with keeping close tabs on Altria's operations, you may be better off looking at other dividend stocks to add to your portfolio.
