Dividend Report Card: Altria

In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

1. Over time, has this company steadily increased its payouts?
2. How sustainable is the dividend?
3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Altria (NYSE: MO), which posts a 6.3% yield.

Dividend history

Source: Company presentation.

Normally, we use a company's trailing five-year dividend-per-share growth rate to score this section, but due to Altria's spin-offs of Kraft in 2007 and Philip Morris International in 2008, an organic five-year dividend growth rate is difficult to ascertain.

In any case, there shouldn't be much question that Altria's dividend history is impressive. In the past year alone, for example, it's increased its dividend twice. What's more, that's on the back of 42 increases in a 40-year period ended 2009. It's very clear that Altria has been good to dividend investors.

Nevertheless, past returns don't guarantee future results, so dividend history is only 10% of the final grade. Altria does, however, score a 5 of 5 in this category.

Sustainability

Source: Capital IQ, a division of Standard & Poor's, as of Feb. 8.

Altria currently yields nearly three and a half times the S&P 500 average of 1.9% -- no, that's not a typo. As such, dividend sustainability is of utmost importance for someone currently invested or considering an investment in Altria.

Based on these metrics, the current dividend appears sufficiently covered by Altria's relatively consistent free cash flow generation.

Growth

Dividend growth potential, while always important to consider, is not as critical when analyzing a high-yield stock like Altria. As long as it can grow at a rate above inflation, it's a fair trade-off.

Over the next few years, there seems to be a good chance of mid-single-digit dividend growth given analyst expectations for 7.5% earnings growth and Altria's target payout ratio of 80%.

The real question is "How long might the growth continue?" Recently, a Citigroup analyst suggested that smoking could "virtually disappear" in developed markets by 2050. Investors in Altria need to ask themselves if they might be investing in a business that could be in steady decline.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

With its current yield at 6.3%, Altria's dividend is slightly above the peer group average, but is by no means an outlier.

Pencils down!
With all the numbers in, here's how Altria's dividend scored:

For a share yielding 6.3%, a grade of "B" is very good, especially since it scored well in the "sustainability" categories. Still, Altria isn't without its risks, so investors would be wise to do some extra due diligence before putting money to work.

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