As Altria's Yield Balloons to 7.5%, Is Its Dividend Sustainable?

Following the recent pullback in its stock, Altria Group's (NYSE: MO) forward dividend yield now sits at a hefty 7.5%. For investors considering this high-yield stock, one of the big questions is whether its dividend is sustainable.

Altria has increased its distribution every year since 2009, but the company is facing difficult trends. Let's look at the company's recent results to find out if its current dividend payout is still sustainable.

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Altria management lowered guidance

In the third quarter, Altria's revenue net of excise taxes slipped 1.7% year over year to $5.25 billion, while adjusted EPS increased by 3.6% to $1.45. Analysts were looking for revenue net of excise taxes of $5.32 billion and adjusted EPS of $1.45.

Despite the increase in adjusted EPS, the company is clearly feeling pressure. The company's cigarette business continues to report sizable shipment declines, with overall shipment volumes dropping by 8.2%. Shipments for its flagship Marlboro brand declined by 11.7% in the quarter, while other premium brand shipments decreased by 9.7%. Discount brand shipments soared 74.5%, while cigar volumes rose 2%.

The company said that many adult smokers are feeling economic pressures, including inflation, which is leading them to move from premium to discount brands. On the bright side, it has taken market share in the discount segment, while Marlboro has slightly increased share in the premium segment, even though it is shrinking.

Meanwhile, Altria's Njoy e-vapor business is currently in a patent dispute with rival Juul, in which it previously had a large stake. Both companies are pursuing litigation against each other, while feeling pressure from illicit flavored disposable e-vapor products, which it estimates make up 60% of the market.

For its smokeable segment, revenue net of excise taxes fell 1.3% year over year to $4.6 billion. Adjusted operating income for the segment edged up 0.7% to $2.96 billion.

For its oral tobacco product segment, revenue net of excise taxes fell 4.3% to $665 million. Segment shipment volumes dropped by 9.6% to 178.2 million units. Adjusted operating income for the segment edged down 0.9% to $460 million. Meanwhile, shipments for its previously hot On! nicotine pouches only rose 0.7% in the quarter to 42.2 million cans. It plans to launch On! Plus in three flavors and three nicotine strengths to help reinvigorate growth.

Looking ahead, the company once again increased the low end of its full-year adjusted EPS outlook, taking it to a range of $5.37 to $5.45, representing 3% to 5% growth. That's up from a previous outlook of $5.35 to $5.45. However, it said it expects a deceleration in EPS growth in Q4.

Altria continues to expect a mid-single-digit EPS compound annual growth (CAGR) rate through 2028.

Is the dividend safe?

In August, Altria raised its quarterly dividend payout by 3.9% to $1.06 per quarter, or an annual rate of $4.24. It was its 60th dividend increase in the past 56 years.

Through the first nine months of the year, the company generated $6 billion in both operating cash flow and $5.9 billion in free cash flow. Meanwhile, it paid out nearly $5.2 billion in dividends over the same period. That's good for just over a 1.1 times coverage ratio. The company also tends to generate more cash in the second half of the year.

Turning to its balance sheet, Altria finished the quarter with debt-to-EBITDA leverage of 2 times, which remains reasonable. Given its coverage ratio and balance sheet, the dividend looks sustainable in the coming years, and the company should still have some room to increase it.

However, the continued big drops in cigarette volumes are worrisome, and with the lower-income consumers under pressure, pricing power could begin to wane. At the same time, younger adult nicotine users appear more likely to turn to illicit flavored vapes or nicotine pouches. That's a tough environment moving ahead for the company.

From a valuation perspective, the company trades at a forward price-to-earnings (P/E) ratio of about 10 based on the analyst consensus for 2026. That's not expensive, but this is a slowly declining business being boosted by price hikes.

Overall, Altria remains a solid dividend play, and with the stock pullback, I think the stock is much more reasonably valued than it was earlier this year.

Geoffrey Seiler 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.