Tobacco king Altria Group (NYSE: MO) has been one of the strongest-performing stocks in the entire market over the past half-century, and dividends have played a vital role in producing its total return.
Growth in Altria's quarterly payout has been consistent and dependable, and in August, the company made its latest increase of 8% to what it pays shareholders every three months. Even with substantial gains, Altria still remains poised to find new ways to become more successful, and that should translate into stronger dividends in the years to come.
Below, we'll look more closely at what Altria has been doing and whether it can keep rewarding dividend investors.
Dividend stats on Altria Group
Data source: Yahoo! Finance. Last increase refers to dividend announcement. * Takes into account adjustments for spinoffs.
How Altria has done such a good job with its dividend
Investors who like income have come to rely on Altria for stable dividend growth. The most recent increase took the quarterly payout from $0.565 to $0.61 per share, or about 8%. Since its 2008 spinoff of Philip Morris International,Altria has made similar-sized increases in the 6% to 10% range.
It's a bit harder to assess Altria's dividend performance over the longer run because of the many corporate reorganizations it has gone through. For instance, when you look at the company's dividend history, it looks like Altria made a huge cut in 2008, moving its dividend from $0.75 per share down to $0.29. But that reflected the spinoff of Philip Morris, which took with it about two-thirds of the company's previous value and continued paying dividends of its own. If you make adjustments to properly allow for the corporate moves that Altria made, the tobacco giant's dividend increase in 2016 brought its streak of annual dividend increases to 47 years.
Altria's dividend history since 2008
Data source: Altria investor relations.
Perhaps the most impressive thing about this track record is that Altria has managed to keep its earnings growing to support higher dividend despite negative trends among consumers, with many smokers having quit and others currently seeking to quit. To achieve bottom-line gains, Altria has used its brand recognition to increase prices enough to offset any declines in sales volume.
Altria's 2016 dividend increase pushed its earnings payout ratio up above the 85% mark, which is higher than most investors would like to see and is above the long-term average for the tobacco company over the years. Investors expect that number to fall, however, because they see earnings growth making up for the move. If things go as anticipated, then the payout ratio should fall back toward its more typical range of 75% to 80%.
What's ahead for Altria's dividend?
Altria has emphasized the importance of dividends in its capital return strategy. On numerous occasions, CFO Billy Gifford has said that dividends get top priority in deciding how to allocate capital. Altria has an official dividend target payout ratio of 80%, and longtime investors look to that benchmark as a guide for what to expect from the company in its dividend moves.
One thing that appears not to be likely to affect the dividend is the company's cash windfall from the sale of SABMiller to Anheuser-Busch InBev (NYSE: BUD). Altria ended up getting even more cash than it had originally expected in the deal, with more than $5 billion coming in. However, the company will need to pay taxes on part of that amount, and it has already used a sizable chunk to bring its stake in Anheuser-Busch InBev above the 10% level at which certain foreign tax credit provisions get triggered. Some believed that a special dividend might follow, but it seems more likely at this point that Altria will keep the cash for stock buybacks or other strategic moves.
With earnings growth on track, Altria will probably make another dividend increase in the second half of 2017. If the company raised its quarterly dividend by $0.05 per share to $0.66, that would represent an 8% rise, squarely in the middle of its previous range. As long as Altria can keep growing its bottom line, dividend investors should count on the tobacco giant's streak of dividend increases to continue in 2017 and beyond.
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