Tobacco company Altria Group (NYSE: MO) has been a solid dividend stock for decades. It has not only paid a dividend for years, but it has also been raising its payouts regularly, giving investors plenty of incentive to buy and hold. Altria has been an effective choice for income investors with a long-term strategy.
But with sales declining and Altria facing an uncertain path ahead, investors might have growing concerns about the stock and the safety of its dividend. Is this an income stock you can reliably hold in your portfolio, or could a cut be coming to the dividend?
Altria's lack of growth could be a big problem
If a business isn't growing and its payout ratio is high, that could be a recipe for disaster for a dividend stock, especially when the company also looks to raise its payout on a regular basis. At some point, the dividend might become unsustainable, forcing the company to either slow down or stop its rate increases entirely, or potentially make a more drastic move such as cutting or suspending its payout.
Last month, Altria reported its second-quarter results, which continued to highlight the company's struggles. Net revenue for the period, which ended in June, declined by nearly 5% year over year to just over $6.2 billion. While the company has tried to pivot to oral tobacco products, and that has generated growth, that segment still makes up a small slice of Altria's business, accounting for just 11% of the top line last quarter.
Why its dividend might not be as safe as it looks
While the company's top line wasn't great, Altria's diluted per-share earnings jumped by 86% to $2.21. That, however, was primarily due to a gain on the sale of commercialization rights for the Iqos tobacco heating system. When adjusting for that and other items, adjusted earnings per share of $1.31 were unchanged from the prior-year period.
Given the boost from the gain, profit numbers are a bit inflated, leading to a relatively modest-looking payout ratio of 67%. To clear out some of that noise, investors can look to the free cash flow (FCF) figure as a better indicator of how well-equipped the business is to continue paying its dividend. FCF tells investors how much money is flowing into the business and how much room there is after capital expenditures to distribute back to shareholders.
And those numbers weren't good last quarter. FCF was a negative $104 million for the period. And on a quarterly basis, Altria pays about $1.7 billion out in the form of dividend checks. The good news for investors is that over the trailing 12 months, it has accumulated $8.8 billion in FCF compared with $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 might not be enough to raise red flags for investors.
Is Altria still a good dividend stock?
Altria's 7.7% dividend yield may look attractive for income investors, but this is not a safe dividend stock. The company is struggling to grow, and until it can prove to investors that it can turn things around, it's probably better to avoid the stock altogether. In five years, shares of Altria are up just 4%, although that increases to 60% when including the dividend.
While the dividend might still be safe for the immediate future, investors shouldn't get too comfortable with Altria's high payout since sooner or later the company may need to reduce the dividend to free up cash to help pursue better growth opportunities.
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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-Yielding Dividend Still Safe? was originally published by The Motley Fool