The FDA’s bid to ban Juul products—like these at a shop in El Segundo, Calif., on a recent day—has weighed on Altria stock. Analysts think Altria, which has a big stake in Juul, will be able to maintain its dividend even if the ban sticks.
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Whenever a dividend yield has a big move upward, it can signal trouble ahead—perhaps a dividend cut or worse. In the case of cigarette maker
Altria Group
,
however, the payout looks secure despite a recent surge.
Altria
(ticker: MO), whose yield is now around 8.6% from about 7% around May 10, saw its yield spike after some bad news in late June that the Food and Drug Administration had banned all of Juul Labs’ vape products from the U.S. Altria paid about $13 billion for a minority—about one-third—stake in Juul in 2018.
On June 22, when the news came out, Altria stock lost about 9%, closing at $41.50, a little below where it closed Friday. The FDA’s Juul ban has been delayed while the company appeals.
Altria is no stranger to problems with its Juul investment. In early 2020, for example, the company said it had taken a $4.1 billion noncash, pretax impairment charge related to the Juul investment. In a release at the time, the company attributed the impairment primarily to “the increased number of legal cases pending against Juul.”
Still, Altria’s dividend “is vital to the investor base,” says Chris Growe, a managing director at
Stifel
who follows the company’s shares. “It is absolutely necessary for their stock, and I think that investors expect it.”
Altria has regularly boosted its quarterly dividend—despite headwinds like the Juul impairment charge—most recently to 90 cents a share.
Growe, who has a Buy rating on the stock and believes its dividend is safe, says that Altria has been pricing its products aggressively, a move that’s “more than compensating for the declines in volume.”
“They are growing their profit, and they are growing their free cash flow each and every year,” he adds.
A commonly used calculation for free cash flow is operating cash minus capital expenditures. Altria’s operating cash flow totaled about $8.4 billion. Subtract about $170 million for capital expenditures, and that left roughly $8.2 billion to cover the dividend and share repurchases.
However, the ability to consistently price above the rate of volume declines should ensure that Altria can continue to increase its revenue, earnings, and dividend.
In a June 22 note following the initial reports that the FDA was on the verge of shutting down Juul’s vape products in the U.S.,
Goldman Sachs
wrote that “continued strong free cash flows this should support MO’s attractive dividend.”
The firm has the stock at a Buy rating with a price target of $59, some 40% above where it closed on Friday.
Last year the company paid about $6.4 billion in dividends—a big chunk of the more than $8.1 billion it returned to shareholders. Altria said in an April filing that its long-term objective is to target a dividend payout ratio of about 80% of the adjusted earnings per share.
Analysts polled by FactSet expect the company to earn an adjusted $4.84 a share this year, up from $4.61 in 2021.
For its part, the company said in an email to Barron’s that “Altria’s core tobacco businesses are highly cash generative and rewarding our shareholders remains a top priority for us.”
Growe is sold. “Is there some regulatory framework where that gets challenged? Sure, down the road that could happen,” he says. “But there’s nothing I would say in the shorter term that would worry me about the dividend.”
Write to Lawrence C. Strauss at lawrence.strauss@barrons.com
