- Shares just $3.20 away from double digit yield again.
- Latest bond offering features pretty good rates.
- This year's dividend raise will likely be very small.
Cigarette giant Altria (NYSE:MO) has always been an income investor's dream. The company has paid a solid dividend over the years, and the quarterly payout has increased very nicely over time. With the recent decline in shares, the stock's dividend yield has jumped again, putting the name just a stone's throw away from having an annual yield in double digits percentage wise.
When I last covered Altria back in August 2019, the company had just raised its quarterly payout to the current $0.84 per share level. At that time, the annual yield was a bit over 7.00%, which represented a spread of almost 525 basis points above the 30-Year US Treasury bond. Shares have declined since then, hitting a low under $31 this year, and the most recent decline has put the yield back above 9.00% as seen below.
(Closing data sourced from Yahoo! Finance)
Primarily due to Altria's yield rise, the spread to the 30-Year is about 780 basis points as of Tuesday's close. Fixed income is yielding basically nothing right now, so high yielders like Altria are where investors need to go to generate any meaningful income. Recently, the company announced strong first quarter results, but it was forced to pull yearly guidance like so many names out there due to the coronavirus.
While Altria may not produce as much revenue or earnings this year as some were hoping for a few months ago, this isn't a name that is in any financial trouble. In fact, the company just borrowed $2 billion at fairly decent rates. The table below shows you this recent offering against the last major debt deal from early 2019 that was used to help with the Juul acquisition.
Yes, this year's bond offering was a lot smaller in dollar terms, but you can see how the coupon rates were also much lower. In total, the weighted average coupon is 3.27% for this year's deal against 5.03% for the February 2019 one. Altria doesn't have any major debts due until May 5th, 2021, but it may use a good portion or all of these new funds to repay some of the $3 billion it borrowed under its credit facility recently as a measure of safety. While the credit line actually has a lower rate now, it is a variable rate borrowing, so this week's deal locks in rates for the long term and provides more financial flexibility for the company in the short term.
If we look at last year's 10-K filing, Altria produced free cash flow of $7.59 billion. The company paid out about $6.07 billion in dividends and repurchased $845 million worth of stock. The buyback has been suspended for now to preserve liquidity, but dividend payments remain at the $0.84 quarterly rate. If there is no dividend raise this year, the company would likely pay out a little more than $6.25 billion in total cash dividends.
While the company did pull 2020 guidance, analysts currently expect revenue and adjusted earnings growth of a couple of percent each this year. It will be interesting to see how free cash flow trends, as that will likely determine how much of a dividend raise we see in a few months. Right now, I would think a small token increase makes the most sense, maybe a penny or two per share per quarter, but I'll have an official prediction after the Q2 report.
In the end, Altria's annual dividend yield is getting close to 10% again. While the name might not provide investors a ton of growth in the future, it certainly is one of the best income producers out there. While the coronavirus will put a dent in this year's results, cash flow production remains strong, and the recent bond deal provides some added financial flexibility at decent rates. If we don't get a major downturn in the business in the next few months, investors could be looking forward to another dividend raise, even if a smaller than normal increase is the best course of action given the current environment.
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