Key Points
Altria is a Dividend King.
With a dividend yield approaching 6%, there’s concern about dividend sustainability.
History shows that nothing is guaranteed with dividend stocks, as even some companies that once had decades-long streaks of payout increases have cut or suspended their payouts. History also confirms that many dividend offenders flashed warning signs, often in the form of unusually high yields.
With a dividend yield of 5.8%, tobacco giant Altria (NYSE: MO) certainly fits the bill as a high-dividend stock. The shares yield more than 5 times as much as the S&P 500 and roughly 100 basis points more than 10-year Treasuries. Throw in the fact that premium cigarette and oral tobacco sales declined in the third quarter, and, understandably, some investors are worried about Altria's dividend heading into next year.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
Altria's dividend yield is high, but the payout looks safe. Image source: Getty Images.
The Marlboro maker is a Dividend King, or a company with a streak of at least 50 years of payout increases. In the case of the tobacco company, it's on a 58-year run of consecutive dividend increases, but history is the past and isn't fully protective against negative dividend action.
Specific to Altria, there are fundamental reasons to believe this payout is sustainable. Yes, the yield and the payout ratio of 88.5% are high, but there's more to the story. Altria's balance sheet is considered healthy, and some experts believe the company's debt-reduction efforts, coupled with the possibility of $10 billion in annual free cash flow, are positive indicators for this dividend stock.
Additionally, Altria isn't burdened by imminent debt maturities. As of the end of last year, just 15% of the company's liabilities are due over the next three years. That's a manageable percentage and one that doesn't imperil the payout. So yes, Altria's yield is undoubtedly high, but the dividend is on firmer ground than it may be getting credit for.
Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.