Altria Group: A Good Dividend Pick?

Mar.17.14 | About: Altria Group, (MO)


Average annual growth of about 13% in dividends.

Payout ratio of about 80% based on adjusted earnings gives it further room to grow dividends.

The company's ability to grow its operating cash flows will support the future growth in dividends.

The tobacco industry cannot be overlooked when making a decision to pick some investments for income. The industry has some of the best dividend-payers in the market. However, the socio-political pressure on the industry has caused less-than-impressive performance from some of the participants. Altria Group (NYSE:MO) is one of the biggest players in the industry, and it is also one of the highest-yielding stocks in the sector. As a result, we have decided to run a test on the company's dividends and future growth in dividends.

Dividend Growth

Altria has been growing its dividends on a consistent basis - there was a fall in the dividend rate, as the company spun off several business units in 2008 to focus on its core tobacco businesses. However, since then, we have seen a consistent increase in quarterly dividends, and the current dividend rate is almost double the post spin-off rate. At the moment, the stock pays an annual dividend of $1.92 per share, yielding close to 5.30%. The company has been growing its quarterly dividends at an average annual growth rate of 13% since 2008. Altria paid $3.6 billion in cash dividends during the last year, and repurchased shares worth $634 million, which means the total cash returned to shareholders was $4.23 billion.

Moving on to the payout ratio - the payout ratio based on free cash flows is pretty strong for Altria, reflecting the highest dividend yield in the industry. The total dividends paid for the last year stood at $3.61 billion, and free cash flows for the same period were $4.25 billion, which puts the payout ratio of Altria at around 85%. The payout ratio based on earnings is close to 80% - according to the company filings, Altria plans to keep its payout ratio based on adjusted earnings close to 80% - the current levels show that the company is successful in maintaining its payout ratio and growing its dividends. However, the payout ratio based on free cash flows is the highest for Altria among the other industry peers, such as Lorillard (NYSE:LO) and Reynolds American (NYSE:RAI) mentioned in this article (shown in the table below).

Dividends paid during the last year

Average Growth in five Years

Free Cash Flows (Billions)

Cash Dividends (Billions)

Payout Ratio

Altria Group


















Click to enlarge

Source: Morningstar

As evident from the table, the dividend growth of the Altria Group holds a decent average among other peers in the industry. Despite a high payout ratio, the company has been able to grow its dividends at an impressive rate over the last five years. Furthermore, the ability of the company to maintain its target payout ratio, along with the growth in dividends is hugely encouraging for shareholders. Altria's current payout ratio gives it some room to further grow its dividends without putting too much pressure on the cash flows. Despite an increase of about 5.6% in capital expenditures, the company has managed to produce robust free cash flows. The company is increasing the capital expenditure guidelines for this year to a range of $150-$200 million. However, the consistent growth in operating cash flows should allow the company to maintain a healthy margin of free cash flows and grow its dividends.

Future Growth Prospects

Altria derives most of its revenue from the tobacco products, which accounts for 84% of its total sales. Being the third-largest cigarette manufacturer in the country, Altria sold approximately 129.3 billion of total cigarette volume over the last year. However, the industry volume has declined due to the less favorable environment for the tobacco industry, which made the industry switch toward diversification. Meanwhile, the key growth driver for Altria is its principal brand, Marlboro, which has been the largest bestselling cigarette brand in the U.S for over 35 years. Although the market for tobacco is highly competitive and characterized by brand recognition, Marlboro's market share is around 43%, with an increase of around 0.3% over the last year.

The leading tobacco companies are opting for technological changes in their product lines in order to introduce reduced-risk products, which include hybrid and electronic cigarettes. Altria has already followed the transition and introduced several reduced-risk products in its product line. The total smokeless product shipment volume was 787.5 million units in the last year, which showed an increase of 3.2% compared to 2012. In addition, the company acquired the e-vapor business of Green Smoke, which represented an important development in Altria's innovation strategy. Green Smoke has sold e-vapor products since 2009, and its revenues for 2013 were approximately $40 million. This will benefit Altria's shifting interest in the reduced-risk products business, and enable the company to reap considerable benefits in the future.


As I mentioned at the start of the article, the stock price movement for the companies in the sector has been poor - Altria is also down over 5% year-to-date. However, the dividend growth prospects and the sumptuous yield make it an attractive pick for income investors. Altria's ability to grow its cash flows will allow the company to continue impressive growth in its dividends, and I believe it is one of the best dividend picks in the sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.