Dividend stock investors have traditionally favored Altria, the company behind Marlboro cigarettes. But now there are worries about debt, falling cigarette sales, and an unclear future for the corporation. Is it still a dividend-paying stock that I should own?
Altria (NYSE: MO) was named Dividend King after rewarding shareholders with increasing dividends for more than half a century. But now those increasing rewards are under jeopardy due to a number of trends:
Shift Away From Smoking Threatens Core Business
Most of Altria’s revenue comes from selling cigarettes, particularly the well-known Marlboro brand. As customers became loyal to the brand over many years, this remained a steady source of revenue for the company.
Concerns about health have prompted many people to stop smoking or find safer alternatives, such as vaping, and the smoking rate has fallen dramatically in recent years.
Cigarette shipments from Altria have been falling at a rate of more than 5% per year for the last five years. And although 80% of Altria’s revenue came from cigarettes a decade ago, that percentage has dropped to 71% presently.
This long-term existential danger is caused by the rapid deterioration of Altria’s primary business. Also, expanding into other product lines has been a challenge thus far.
Failed Attempts to Diversify
As cigarette sales continue to fall, Altria is scrambling to find ways to turn a profit. One of its first 2018 acquisitions was a 35% share in e-cigarette firm Juul, which it paid $12.8 billion for.
The development ambitions of Juul were swiftly dashed due to regulatory scrutiny and safety concerns, though. In the time after, Altria reduced the value of its investment by 95%.
Not long ago, in 2021, Altria paid $1.5 billion to get the rights to IQOS, a tobacco heating alternative, in North America. A little over three percent of Altria’s sales comes from smokeless goods like IQOS, even if they’re on the rise.
Just before the pandemic recession hit, Altria took on a lot of debt to fund its expensive and ultimately disastrous diversification efforts.
Rising Debt Burden Adds Risk
Over the last five years, Altria has taken out a lot of loans to pay for dividends, stock buybacks, and its botched acquisitions. There has been an increase in long-term debt from $14 billion in 2018 to $27 billion presently.
Additionally, in comparison to comparable dividend stocks, its debt-to-equity ratio has ballooned to 11, which is exceedingly high.
Potentially limiting Altria’s potential capital returns is their substantial debt load. More money will be needed just to pay the interest on its debts now that rates are going up.
Unsustainably High Payout Ratio
Revenue and profitability for Altria have decreased in recent years due to falling cigarette quantities, despite the fact that the company has increased its dividend payout. Consequently, the dividend payout ratio has skyrocketed to almost 83% of earnings.
Dividends could be reduced if financial performance continues to decline, as indicated by payout ratios exceeding 80%. When compared to other diversified consumer staples companies, Altria’s payout ratio is rather high.
To maintain earnings per share (EPS) and future dividend increases, Altria will have to spend significantly on stock buybacks and price rises, as cigarette sales are expected to decline by another 3-4% every year. The main business’s continued decline, however, suggests that it can only rely on financial engineering strategies for so long.
Concerns Over Long-Term Dividend Growth
In spite of all these obstacles, Altria has now increased its dividend growth record to 54 years in a row. The dividend growth rate over the past decade averaged 7% each year, but going forward, it’s unlikely that it will be able to replicate that rate.
It is possible that dividend growth will stall or perhaps be reduced if initiatives such as IQOS are unable to stabilize financial results. The number of lucrative smokers from whom Altria can extract dividends is decreasing as smoking rates continue to fall.
The firm does not have the financial flexibility to incur additional debt in the future to cover shortfalls due to its high payout ratio and debt load.
Is Altria Still Worth Owning for the 9.5% Yield?
The forward dividend yield for Altria, at its present price, is close to 9.5%. And with a price-earnings ratio of approximately 8x compared to 10x over the last five years, shares appear to be fairly priced.
So, the stock might still be attractive to income investors. Investors, however, should be cognizant of the fact that Altria’s payouts are vulnerable to long-term risks.
It may have to choose between paying dividends, repurchasing stock, or paying down debt if it struggles to meet its obligations due to accelerating cigarette reductions or rising loan expenses.
Obviously, Altria is still a cash cow, so dividend cutbacks aren’t in the horizon. Payout growth in the future, though, may lag well behind broader markets.
In an explanation of its decision to discontinue sales of its three flagship brands in Russia earlier this year, consumer staples major PepsiCo (NASDAQ: PEP) stated:
“As a system, we must protect long-term value creation over short-term gains.”
Given the difficult road ahead, careful dividend investors may choose to shun Altria stock today, much like Pepsi did in the past when it prioritized ideals over profits.