I'm a huge fan of most dividend stocks. I love investing in companies that pay sizable dividends that steadily increase. That's because they'll supply me with a growing income stream, which should eventually provide me with enough passive income to retire.
Given my fondness for big dividends, Altria Group (MO 0.26%) would seem to fit my strategy. It pays a 9.7%-yielding dividend that it has increased 58 times in the last 54 years. However, I won't touch the stock with a 10-foot pole. Here's why.
An alluring dividend
Altria Group offers a very tempting dividend. The leading U.S. tobacco company pays one of the highest-yielding dividends (its 9.7% yield is several times above the S&P 500's 1.4%).
And its payout is sustainable. The company generates very stable earnings and cash flow that steadily rises. Altria returned $7.8 billion in cash to its shareholders last year, paying $6.8 billion in dividends and repurchasing $1 billion in stock. The company also has a very solid balance sheet. Its leverage ratio ended last year at 2.2 times, putting it close to its target of 2.
Meanwhile, the company's top priority is to grow its dividend consistently. It established a new progressive policy to increase its already attractive payout at a mid-single-digit rate each year. The company delivered on that promise last year by raising its payout by 4.3%. That extended its streak to 54 straight years of annual dividend growth, keeping Altria in the elite group of Dividend Kings.
Why I still won't touch Altria
While Altria pays a very generous and steadily rising dividend, I personally can't get behind a company that makes most of its money selling cigarettes. On top of the health dangers of smoking, I can't stand the smell of secondhand smoke. So it's just not a company I'd ever want to own.
However, while personal preference is the main reason Altria will stay out of my portfolio, it's not the only one. I don't believe the company's strategic move beyond smoking will pay dividends for investors.
Altria has invested heavily to acquire companies outside of the (thankfully) declining cigarette sector. It has made several investments in makers of smokeless tobacco products, including paying nearly $3 billion for e-vapor company NJOY last year.
However, a couple of its high-profile investments haven't paid off. The company's decision to invest $12.8 billion for a minority stake in JUUL went up in smoke as it incinerated shareholder capital.
Altria ultimately exchanged that stake for intellectual property rights for heated tobacco valued at a mere $250 million. It also made a money-losing investment in Canadian cannabis company Cronos Group.
Meanwhile, its other investments outside the cigarette sector aren't really driving much growth. Earnings were only up 2.3% last year, and it foresees a 1% to 4% rise this year. While the company has grand growth ambitions -- it wants to double its smoke-free revenue to $5 billion over the next several years -- its smoke-free sales volumes were basically flat last year.
If the company can't accelerate its growth rate, it will eventually run out of room to increase its dividend. It's currently increasing its payout faster than its adjusted-earnings growth rate, which is a concern given its high dividend payout ratio (79% of its adjusted earnings). As the payout ratio rises, Altria will retain less cash to repurchase shares, repay debt, and fund new investments.
Lastly, even though its balance sheet is solid right now, future debt-funded acquisitions to expand beyond smoking could weaken its financial position. Altria might need to cut its dividend to shore up its balance sheet if it makes another big money-losing deal.
Altria isn't right for me
Even though Altria offers a big-time dividend, I'd personally rather see it go out of business, which is why I won't touch the stock. On top of that, I have concerns about its move to grow beyond smoking, given that two of its investments have already gone up in smoke. While other investors might have no qualms about owning Altria, one of the great things about being an active investor is that we can each make our portfolios reflect our values. Altria doesn't reflect mine, which is why I'm passing on its big-time payout.
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
