Altria Takes On Its Biggest Challenges Yet

Note: Today’s Safety Net comes from Assistant Research Manager Andrew Hubbarth. Chief Income Strategist Marc Lichtenfeld is currently returning from the 2020 Private Wealth Seminar in Park City, Utah, where he livestreamed to Oxford Club Members about the best opportunities in today’s market.

The popularity of traditional cigarettes has been in decline for years, but Altria‘s (NYSE: MO) dividend continues to rise as the company diversifies into new vices.

The days of the Marlboro Man and product placement in “cool” movie scenes are mostly gone – so Altria has shifted much of its attention to vaping and even marijuana.

But Altria still controls Philip Morris USA, and it makes a significant portion of its revenue from traditional tobacco products.

This revenue stream is reliable due to the difficulties of quitting tobacco – even in the face of higher tobacco taxes, strict advertising controls and younger demographics avoiding the substance.

And in 2018, Altria looked to pick up the slack from some of these challenges with a massive $12.8 billion (35%) investment in electronic cigarette manufacturer Juul Labs.

This deal has been controversial from the start because of monopoly concerns. This past April, the Federal Trade Commission even filed an antitrust lawsuit against Altria.

It will take time to resolve, but in January, Altria took a $4.1 billion write-down of its Juul investment due to the increasing number of lawsuits it faced.

Some of the lawsuits focused on vaping-related lung illnesses, and some contended that young people have been targeted by deceptive marketing.

Also in 2018, Altria bought 45% of Canadian marijuana company Cronos Group (Nasdaq: CRON) for $1.8 billion.

This investment has yet to be profitable, as the overall cannabis industry has declined after a much-hyped beginning just a few years ago.

Do these hurdles mean Altria’s dividend is in trouble?

Altria has raised its dividend each year since its last cut in 2008, and its dividend has grown 10% over the last five years.

This earns a positive mark in the SafetyNet Pro grading system.

Altria’s current quarterly dividend is $0.84.Like many companies facing uncertainties due to the coronavirus pandemic, Altria withdrew its 2020 profit forecasts.

However, management reiterated that the dividend “is a top priority.” It also stated that it is targeting an 80% payout ratio.

That’s good news because Altria’s 2020 payout ratio is currently forecast at 77% and set to hold steady in 2021.

Altria said the impact of the pandemic was “not material” to its business because most of its products are sold in convenience stores and other places deemed essential.

Still, there are concerns that downgrades to cheaper products will decrease profit margins.

Altria also borrowed the full $3 billion available through its credit revolver, which provides a cash cushion but also signals uncertainty even when a company is publicly confident.

And yet, despite the company’s legal uncertainties, pandemic concerns and questionable diversification efforts, its free cash flow forecast looks comforting.

Altria should continue to provide a safe return.

Dividend Safety Rating: C

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Good investing,

Andrew

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