As long-term dividend investors, we are primarily concerned with finding sources of safe, predictable, and growing income. We do not hold ourselves up nearly high enough to judge what is morally or ethically right or wrong, as practically every company has plenty of issues (both visible and hidden) that could be picked on – the media just enjoys targeting the most visible and widest-reaching issues.

 

MO’s dividend is very secure (83 Safety Score) with more moderate growth prospects (31 Growth Score) given the mature nature of the US tobacco industry. However, a consolidating tobacco industry, a long runway for continued Marlboro price increases, favorable demand inelasticity trends, a current dividend yield in excess of 4%, and continued productivity improvements set the table for double-digit total return potential going forward.

 

To view all of MO’s key fundamental and dividend data in easy-to-read charts, click here. This helps us save hours of time finding and researching quality dividend stocks and is the source of most of the data referenced in our analysis below.

 

Business Overview

Most investors associate MO completely with cigarettes (Marlboro has been the largest-selling cigarette brand in the US for 35+ years), but it is important to recognize that the company generates 25% of its EBIT from smokeless products (12% of EBIT; 60%+ operating margins!) and beverages (13% of EBIT). After splitting into three companies in 2007 (Altria, Phillip Morris International, and Kraft), MO retained all domestic tobacco operations – it hasn’t been hurt by the strengthening US dollar but also doesn’t have the exposure to faster-growing international markets. Most recently, MO entered the e-vapor category in 2013 and acquired Green Smoke in 2014 to further bolster its position in this emerging market.

 

Stock Performance

Has MO created value for shareholders? The easiest way to answer this question is to evaluate long-term performance trends. For MO, the answer is a resounding “YES”. As you can see below, the stock has outperformed the market by a significant margin almost every year for the last two decades.

 

MO Total Shareholder Return

MO TSR Graph

 

Dividend Analysis

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. MO’s long-term dividend and fundamental data charts can all be seen here.

 

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.

 

MO scored a high Safety Score of 83, suggesting its dividend is safer than 83% of all other dividend stocks.

 

MO’s trailing twelve months EPS payout ratio (80%) and free cash flow payout ratio (83%) have predictably remained right around management’s 80% target level. While this level would be approaching risky levels in more cyclical industries, the stable nature of the tobacco industry alleviates these concerns. However, a higher payout ratio does make a company more dependent on earnings growth to continue raising its dividend payout (MO targets 7-9% annual EPS growth).

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