Editor’s Note: On December 4, Research Analyst John Oravec analyzed Walgreens Boots Alliance (Nasdaq: WBA) in Safety Net, giving it an “F” grade due to an “unsustainable” payout and a “catastrophic” decline in cash flow. At the time, Walgreens had by far the highest dividend yield in the S&P 500 at over 11%, and it had paid a dividend every year since 1933.
Not anymore.
The company announced last week that it is suspending its dividend indefinitely, which means it has lost its title as the highest yielder in the S&P 500.
Today, Chief Income Strategist Marc Lichtenfeld evaluates the S&P’s new dividend king. Is its dividend any safer than Walgreens’ was? Find out below!
– James Ogletree, Managing Editor
Altria Group (NYSE: MO), the owner of cigarette brands Marlboro and Parliament, chewing tobacco brand Copenhagen, and e-cigarette brand NJOY, has the corporate slogan “Moving Beyond Smoking.”
That being said, cigarettes accounted for $21 billion of the company’s $24 billion in revenue in 2024. Total revenue slipped 1.9% for the year, while cigarette revenue fell 2.5%.
The company pays an impressive dividend of $1.02 per share, which comes out to a 7.8% yield – easily the highest in the S&P 500 now that the former titleholder, Walgreens, has suspended its dividend.
But can investors rely on Altria’s dividend like smokers can rely on being banished to the outside when they need a smoke?
Altria generated $8.6 billion in free cash flow in 2024, down from over $9 billion in 2023. This year, free cash flow is forecast to decline again to $8.2 billion.
Should that occur, Altria will have had almost no net growth since 2020.
A company with falling free cash flow gets penalized by the Safety Net model, because free cash flow is the lifeblood of all dividends. If free cash flow is declining, warning bells go off in the model. Even if a company can still afford its dividend, its rating gets downgraded, because if the trend continues, the dividend could be in jeopardy in the future.
Last year, Altria paid $8.6 billion in dividends, or 79% of its free cash flow. That’s a little above my 75% threshold. In most cases, I want to see a payout ratio of 75% or lower. That way, if cash flow falls, there is still a buffer that will help the company fund the dividend.
With slightly higher dividends expected in 2025 and free cash flow projected to drop again, Altria’s payout ratio is anticipated to rise to 83%.
That could be a problem, but Altria has a remarkable track record of raising the dividend. Shareholders have received an increased payout every year since 1970. Back then, Nixon was in the White House and Bridge Over Troubled Water by Simon and Garfunkel won the Grammy for Album of the Year. That was a long time ago, so that dividend-paying history is impressive.
Additionally, management said it expects dividend growth in the mid-single digits through 2028.
However, despite Altria’s one-point bonus due to its excellent dividend track record, we can’t ignore that its free cash flow is deteriorating and its payout ratio is a bit too high. Those are both negatives, and as a result, Altria’s safety rating is not good.
It’s hard to imagine the company ruining a five-and-a-half-decade streak of annual dividend increases in the near future – especially when it just guided Wall Street to dividend growth for the next four years.
But if cash flow falls more than expected in 2025 and shows no signs of reversing, management may have to change its tune in a year or two.
I don’t see an immediate cut happening, but keep your eye on the S&P 500’s new dividend king in case the financials continue to deteriorate.
Dividend Safety Rating: D
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