Can Altria Raise Dividend Indefinitely? (MO, PM, RAI, LO)

Some companies are unmatched on the rate at which they pay out their dividends.  Former DJIA component Altria Group, Inc. (NYSE: MO) definitely falls into that category, as do many tobacco sector peers.  Today came the announcement that it is increasing its quarterly dividend by over 6% to $0.34 per share of common stock per quarter.  The prior quarterly dividend rate was $0.32 per quarter.  At an annualized rate of $1.36 per share and with shares at $18.15, this generates a yield right at 7.5% per year.  The risk-free yield of the comparable Treasury is about 0.44% and the average yield of all S&P 500 stocks is roughly 1.88%.  What we are curious about is how long through time Altria can keep paying dividend rates of this magnitude.

For starters, Altria has a history of juicing up its dividends.  Even during the woes of its major legal challenges in the late 1990’s, the company kept paying out a massive dividend rate.  If you take analyst earnings expectations from Thomson Reuters, then there is plenty of dividend coverage here for a company that doesn’t mind paying out the majority of its income.  The analyst estimates for 2009 and 2010 are $1.74 EPS and $1.86 EPS, respectively.  So if this comes true as the estimates indicate, then you could even see another $0.02 increase per quarter or $0.08 per year in 2010.  Then consider that Altria generally beats estimates.

It isn’t as if there is a huge expansion coming in tobacco that the company would want to hoard cash so it can use it for R&D.  Its marketing dollars are also somewhat limited because of the notion that it is so restrictive for tobacco companies to advertise.  It also isn’t as if the company has to consider a major wave of hiring ahead.

Calling for the ultimate demise of the tobacco industry has been going by many brokers and financial advisors since the 1980’s that we are aware of.  Yet it has never happened.  And Altria keeps hiking its payout to shareholders.  Even the end of smoking in many cities in all bars and restaurants and even the tax hikes from states have failed to kill the industry.  Because so many states rely upon tobacco taxes and old settlement  tobacco payouts from all the health damages of the past, there has always been a fine line between how much states or municipalities want to try to tax tobacco to the point that they still get to keep those future revenues.  Yep, just about every state government has a vested interest in making sure that they do not actually kill the tobacco sector overnight.

Philip Morris International, Inc. (NYSE: PM) is the old international operations spin-out of Altria.  As it is supposed to be more of the growth engine for the company, it has a lower dividend yield of roughly 4.7% today.  But it also has even more of a dividend coverage than Altria as its annual dividend of $2.16 compares to Thomson Reuters estimates of $3.21 EPS for 2009 and $3.64 EPS for 2010.

As far as elsewhere, Reynolds American Inc. (NYSE: RAI) pays $0.85 per quarter per share as a dividend.  That $3.40 annual dividend translates to a yield of about 7.4% as well.  And that $3.40 per year translates to Thomson Reuters estimates of $4.54 EPS for 2009 and $4.72 EPS for 2010.  Its brands are CAMEL, KOOL, PALL MALL, DORAL, WINSTON, SALEM, and more.

Competitor Lorillard Inc. (NYSE: LO) recently bumped up its dividend as well to $1.00 per quarter from $0.92 per quarter.  With a $4.00 annualized dividend it “only” pays a 5.4% dividend yield.  That is still extremely high compared to most stocks.  And as far as its dividend coverage, that is easy and has room to grow through time also.  Thomson Reuters has estimates for 2009 at $5.86 EPS and 2010 at $6.39 EPS.

So if you look at the dividend trends elsewhere and the dividend coverage, it seems that not only can Altria keep up a high payout.  It might get to keep hiking the dividend rates.  Altria’s quarterly dividend rate is payable on October 9, 2009 to stockholders of record as of September 15, 2009. The ex-dividend date is September 11, 2009.  There will be some unusual options activity in mid-September as this is a large enough dividend to go after a dividend capture trade.

JON C. OGG
August 27, 2009