On August 25th, we learned that Altria (NYSE:MO) raised its dividend by 4%. That works to $3.76 per year, giving investors an 8.2% yield. That’s mostly positive news, albeit I predicted $3.88, so I was out by $0.12 from my projection. In terms of profits, here’s why: mo is looking at a price range of $4.79 to $4.93, so we’re on the right track. I believe we should go with $4.85, which is precisely in line with the experts and within mo’s estimates.
This was my primary premise before mo’s latest dividend announcement: it’s as easy as that. Using the $4.85 adjusted profits forecast for 2022 and the 80% payment, the new dividend will likely be $3.88. This all boils down to the that mo expects to earn $4.70 per share in 2022. The math is straightforward. Divide the dividend by 80%. You’re mistaken if you think I’m just plucking something out of thin air.
Altria group aims for a dividend payment ratio of around 80% of adjusted profits per share.
What is Altria expecting?
I’m not upset about mo’s dividend rise. I want to be clear about this. I’m not depressed or disappointed. Instead, I’m perplexed since my profit projections look farther off than I anticipated. According to the q2 2022 earnings call presentation, eps is expected to range between $4.79 and $4.93. However, using the 80% payout of earnings, we are below the low end of mo’s forecast.
To refresh your memory, the guidance is based on adjusted diluted eps. Furthermore, the 80% payout ratio is based on adjusted earnings. So any hypothetical disparity is irrelevant. I was curious whether a large amount of debt was due in late 2022 or early 2023. My cursory examination revealed very nothing. I see around $1.5 billion due in 2023, and if they roll it out, it would most certainly be at higher interest rates. So there may be a desire to clear that out with earnings. But, again, that’s 2023. In late 2018, debt did increase.
Why are we looking at debt?
First and foremost, I’m not concerned about mo’s debt. Nonetheless, this is a crucial small journey in many respects. Even while earnings and dividends are soaring, we’re witnessing a long-term impact on mo’s company. In other words, it’s annoying, if not tragic, that mo appears to have messed up with Juul. However, because the firm is so excellent, the shareholder benefits continue.
At the same time, it’s unclear if mo will pay down the debt or let it go. I’ve reviewed the quarterly reports and haven’t found anything concerning mo’s debt or intentions to pay it off. I’m seeing some really decent interest rates (e.g., 1%, 1.7%, 3.125%), but I’m also seeing some “ugly” rates out to 2039, 2049, and 2059 (i.e., 5.8%, 5.95%, and 6.2%).
Net debt-to-EBITDA ratios of less than three are generally seen as acceptable. The lower the ratio, the more likely the corporation will effectively pay off its debt. Proportions more significant than 3 or 4 are “red flags” that signal the firm may be in financial trouble in the future.
The most intriguing point here is that mo’s debt to Ebitda ratio is about 5.8 and there are “red lights” when ratios of 3 or 4 are exceeded. Before this in-depth examination, I was unaware of the magnitude of the Juul debt load. Like many investors, I assumed it was all water under the bridge and could be managed. I’m seeing more clearly today that the Juul-related debt is an albatross around our dividends’ neck.
Wrap up
Something still doesn’t stack up with the Juul purchase. I already knew Juul was a dud. I explained how it was making no difference to mo’s bottom line. At the same time, I’m seeing more and more evidence that it might be pushing down mo’s dividends, either directly or indirectly. At the very least, the Juul debt is unsightly on the balance sheet, with no current upside. Frustrating.
I’m not sure that Juul is to blame for my $0.12 dividend shortfall. According to the preceding analysis, perhaps a bit. But the most bizarre aspect of this deeper look is just the arithmetic. We know mo pays out 80% of earnings, and basic math tells us that adjusted eps should be closer to my $4.85 forecast than the $4.70 we’re seeing today.
Perhaps this is how it might operate. Mo paid out $0.90 in the first and second quarters, and it’s highly guaranteed that mo will pay out $0.94 in the third and fourth quarters. This increases our total for the year to $3.68. Using the same calculation and the 80% payment, we arrive at $4.60. But here’s the issue that I can’t quite square. Backing out that $4.60 in adjusted eps still doesn’t bring us into the $4.79 to $4.93 range that mo hinted at on the q2 2022 earnings call.
I see the dividend increase as a “miss” by mo when I add everything. I’m not furious or irritated, and I haven’t given up on mo. But my trust has been shaken. I’m sure I’m missing something, but I don’t like that it’s not evident. Mo is a “buy” from a value standpoint, but my mathematical ignorance has left me in a neutral position. I’m not buying or selling anything. I’m going to put myself on hold until this is handled.
Featured Image : Megapixl © Rafaelhenriquepress
