Dividend Farming Scorecard: Altria (MO)

Altria and Philip Morris have been in talks since August about merging their operations after separating roughly a decade ago.  Altria is a Dividend Champion having raised its dividend payments for nearly a half century – 49 years.  MO is also a holding on the Dividend Farm first having been acquired decades years ago and held for the duration.

Given the recent news about MO, its Champion status, and the nature of its business, I decided it was time to build a Scorecard for the firm.

Below is the card for Altria as of September 13, 2019.  The table provides a snapshot of factors being scored.  I’ll be assessing how well MO meets my targets as well as whether or not it provides a better investment fit than alternatives.

FACTOR	TARGET METRICS	LOW
CCC List	Champion	Champion
Current Yield	4.0%	7.34%
Company Profile	Red Flags?	Tobacco, vaping, cannabis, and liquor
Industry Leadership	Top 10	#1 by U.S. market share
Market Cap	$10 B+	$78.8 B
P/E	< 20	12.6
P/B	< 2	5.45
Debt / Equity	< 1	2.8
Dividend History (Years)	25	49
12 Month Price Range	Lower Half	Near 52-week low
Dividend Payout Ratio	< 75%	95.5%
Portfolio Weight	Under to Slightly Over	Slightly Over

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers where I normally start.  Altria is a Dividend Champion with nearly 50 years of dividend growth.  It’s a strong record, well above my 25 year target.

Current Yield:  MO’s trailing yield is 7.34% which is well above my desired target by nearly double.  The long-term trend of dividend growth is a high double digit figure and the payments are nice to get.  However, a yield eclipsing 7% can indicate a level of risk that isn’t warranted if the portfolio weight is significant.

Company Profile:  MO has been a cash cow for years.  It has weathered major regulatory, legislative, and public relations storms while continuing to generate a nice dividend.  One may wonder how long that trend can continue as society here and abroad become increasingly health conscious.  MO has been working on non-tobacco diversification, but it’s done so in other areas that may be as risky, if not more so, than tobacco.

Industry Leadership:  MO is the #1 tobacco firm in the U.S. by market share per Motley Fool.

Market Capitalization:  Having a market cap exceeding $78 B means the firm is nearly 8 times my minimum target.  This is great for investment stability even when the price is near its 52-week low. 

Price to Earnings:  The trailing P/E is nearly 40% below my high water mark of 20.  I appreciate ratios below 20.  The price can bump up quite a ways and still be within the bounds, so that’s good.

Price to Book:  The P/B ratio is nearly 2.5x my comfort level.  I don’t mind paying a small premium, but premiums may come with risk.  The bigger the premium the larger the risk it seems. 

Debt to Equity:  Debt to equity is nearly 3x my max.  MO has put a lot of money into new ventures with limited cash flow history e.g., Cronos, making a Farmer wonder if the juice (return) is worth the squeeze (debt).   

Dividend History:  Growing dividends for 49 years is great.  Nearly doubling the minimum Champion range of 25 years speaks volumes about a firm’s consistent ability to throw off cash.  Furthermore, MO has accelerated its dividend growth rate for the past 10 years.  As with nearly all things, acceleration is not infinite.  Growth is an issue to watch. 

Price Range:  The price is within pennies of its trailing 12-month (TTM) low as of this writing.  That could very well be bargain territory, even for those who are risk averse.  However, the value has fallen by nearly one-third during the past year.  A decline like that could be a real bonus to buyers or the harbinger of something bad.  Time will tell.

Payout Ratio:  The payout ratio of 95.5% is beyond my 75% target ceiling.  MO has generated solid earnings with which to support this ratio and done so for a long time.  It stands to reason it will continue doing so over the short run. 

Portfolio Distribution:  MO is a long-time holding for me.  It predates my start as a Dividend Farmer – by decades.  The compound growth associated with reinvested MO dividends has helped bulk up the Dividend Farm, but adding additional weight may not be prudent.

Analysis  

My overall experience with MO has been good – financially.  The dividend history and yield have treated me well as I’ve accumulated a solid position.  The price currently appears favorable, but the price to book, even at a depressed value, is bothersome.  The same is true of the heavy debt incurred by purchasing risky operations.  The public relations and regulatory volatility and uncertainty inherent in the tobacco industry implies a level of risk I may not want if MO were a new add to the farm.  As a current crop, though, I don’t believe I’ll discontinue farming it.  Instead, I’ll look at redirecting MO dividends to other financial crops reducing MO’s weight in the portfolio without incurring selling costs or capital gains taxes through aggressive rebalancing. 

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.