Altria (NYSE: MO) makes cigarettes and smoke-free tobacco products. Its brands include Marlboro, Skoal and IQOS.

Despite cigarette smoking reaching a new low in 2022, Altria continues to generate lots of cash flow and pays a generous 8% dividend yield. While the company attempts to make its products safer, can we say the same about its robust dividend?

Let’s take a look.

Free cash flow has been fairly steady over the past few years, though it dipped in 2022. Even though it was a small decrease, the Safety Net system does not like to see free cash flow heading in the wrong direction.

This year, free cash flow is forecast to spike 10%. That’s good to see, but it doesn’t erase the decline from last year.

The payout ratio is a little high.

Last year, Altria paid shareholders 82% of free cash flow in dividends. This year, with higher cash flow expected, the payout ratio is projected to dip to 78%. Though that’s still above my comfort zone.

For most companies, I want to see a payout ratio of 75% or lower. That gives me confidence that even if a company stumbles and free cash flow drops, it can maintain its dividend. Above that level, I get concerned.

Altria has raised its dividend every year since 2010. The current quarterly dividend of $0.94 comes out to a yield of 8%.

It did cut the dividend in 2007, 2008 and 2009, but Safety Net has a 10-year statute of limitations on dividend cuts. So the fact that it has raised its dividend every year for the last 13 years is positive.

I mentioned that Altria gets dinged for the lower free cash flow last year. It also gets penalized for the high payout ratio.

As of right now, the dividend doesn’t look to be in jeopardy. But if free cash flow doesn’t materialize the way Wall Street expects, that big dividend could get smoked.

Dividend Safety Rating: C

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