Editor’s Note: Back on December 4th, Research Analyst John Oravec took a close look at Walgreens Boots Alliance (Nasdaq: WBA) for Safety Net, assigning it an "F" because of what he called an unsustainable payout and a significant cash flow plunge. At that moment, Walgreens boasted the S&P 500’s highest dividend yield, topping 11%, and it had consistently paid out dividends since 1933.
That’s no longer the case.
Just last week, Walgreens revealed it is indefinitely suspending its dividend, which means it’s no longer the top yielder in the S&P 500.
Today, the spotlight shifts to Chief Income Strategist Marc Lichtenfeld as he assesses the new dividend leader in the S&P. Is this new dividend champion more secure than Walgreens was? Let’s dive into the details!
– James Ogletree, Managing Editor
Altria Group (NYSE: MO), well-known for cigarette brands Marlboro and Parliament, as well as the chewing tobacco brand Copenhagen and e-cigarette brand NJOY, carries the slogan “Moving Beyond Smoking.”
Nevertheless, cigarettes made up a staggering $21 billion of Altria’s $24 billion revenue in 2024. The total kicked into reverse, slipping by 1.9% for the year, while cigarette earnings saw a 2.5% dip.
Currently, Altria offers a noteworthy $1.02 per share dividend, translating to a 7.8% yield—now the highest in the S&P 500 following Walgreens’ recent dividend suspension.
But just how reliable is Altria’s dividend in the same way that smokers can count on heading outdoors when they light up?
Altria’s free cash flow in 2024 was $8.6 billion, a drop from over $9 billion in 2023, with forecasts for 2025 suggesting a further decline to $8.2 billion.
If this happens, Altria will have seen almost zero net growth since 2020.
Falling free cash flow is a red flag in the Safety Net model because it’s the lifeblood of any dividend. A declining cash flow sounds alarm bells, suggesting even if a company can maintain its dividends now, its future stability could be at risk if the trend continues.
Last year, Altria distributed $8.6 billion in dividends, translating to 79% of its free cash flow, just over my 75% comfort zone. Typically, I like a payout ratio no higher than 75%, as it provides a cushion if cash flow decreases.
Looking ahead to 2025, as dividends slightly rise and free cash flow projects downward again, Altria’s payout ratio might climb to 83%.
This could spell trouble, but Altria has an impressive record of boosting its dividend, having done so every year since 1970. That’s back when Nixon was president, and Simon and Garfunkel’s Bridge Over Troubled Water took home the Grammy for Album of the Year—a testament to Altria’s strong dividend history.
Moreover, the management anticipates dividend growth in the mid-single digits until 2028.
Nevertheless, despite Altria earning a bonus point for its stellar dividend history, the declining free cash flow and high payout ratio cannot be ignored. Both factors cast a shadow on its safety rating.
It’s tough to envision Altria breaking its streak of dividend hikes any time soon, particularly after signaling dividend growth for the next few years to Wall Street.
However, should cash flow decrease significantly in 2025 without signs of recovery, the company may have to reconsider its approach in a year or two.
An immediate dividend cut seems unlikely, but it’s wise to keep a watchful eye on the S&P 500’s new dividend leader to see if financial conditions worsen.
Dividend Safety Rating: D
What stock’s dividend safety should I review next? Drop the ticker in the comments section.
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