Tobacco company Altria Group (NYSE: MO) has been a solid dividend stock for decades. It has not only paid dividends for years, but has also regularly increased its payouts, giving investors ample incentive to buy and hold. Altria is an effective choice for income investors with a long-term strategy.
But with sales declining and Altria facing an uncertain future, investors may be concerned about the stock and the safety of its dividend. Is this an income stock you can reliably hold in your portfolio, or could a dividend cut be on the way?
Altria’s lack of growth could be a major problem
If a company isn’t growing and its payout ratio is high, that can be a recipe for disaster for a dividend stock, especially if the company also regularly seeks to increase its payout. At some point, the dividend could become unsustainable, forcing the company to slow or stop raising rates altogether, or possibly take a more drastic step such as cutting or suspending the payout.
Last month, Altria reported second-quarter results that continued to highlight the company’s struggles. Net sales for the period ended in June fell nearly 5% year over year to just over $6.2 billion. While the company has tried to move into oral tobacco products, and that has led to growth, that segment is still a small part of Altria’s business, accounting for just 11% of sales last quarter.
Why the dividend may not be as safe as it seems
While the company’s top line wasn’t stellar, Altria’s diluted earnings per share rose 86% to $2.21. However, that was largely due to a gain on the sale of commercialization rights to the Iqos tobacco heating system. After adjusting for that and other items, adjusted earnings per share of $1.31 were unchanged from the year-ago period.
Given the boost in earnings, the profit numbers are a bit inflated, leading to a relatively modest-looking payout ratio of 67%. To remove some of that noise, investors can look to the free cash flow (FCF) figure as a better indicator of how well the company is equipped to continue paying its dividend. FCF tells investors how much cash is flowing into the company and how much room there is after capital expenditures to distribute back to shareholders.
And those numbers weren’t good in the latest quarter. FCF was negative $104 million for the period. And on a quarterly basis, Altria pays out about $1.7 billion in dividend checks. The good news for investors is that it collected $8.8 billion in FCF over the past 12 months, compared to $6.8 billion in dividend payments, which represents 77% of its free cash. FCF can also fluctuate from one period to the next, so one concerning quarter may not be enough to raise red flags for investors.
Is Altria Still a Good Dividend Stock?
Altria’s 7.7% dividend yield may seem attractive to income investors, but this is not a safe dividend stock. The company struggles to grow, and until it can prove to investors that it can turn things around, it’s probably best to avoid the stock altogether. In five years, Altria’s shares are up just 4%, though with the dividend, that’s up 60%.
While the dividend may still be safe for the foreseeable future, investors shouldn’t get too excited about Altria’s high payout. Sooner or later, the company may have to cut the dividend to free up cash for better growth opportunities.
Should You Invest $1,000 in Altria Group Now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is Altria’s High-Yield Dividend Still Safe? was originally published by The Motley Fool
