It’s easy to love and hate Altria (NYSE: MO) at the same time. If you’re a dividend investor, its 4.2% yield is attractive. If you’re anti-smoking or concerned about anti-smoking regulations, Altria is a tough stock to invest in.

The U.S. and state governments have been cracking down on smoking for years.

Many laws are on the books that make it impossible to smoke anywhere other than your own home or car.

And there is constant back and forth about how to regulate nicotine.

Despite these issues, Altria continued to grow cash flow… until last year.

What happened to halt Altria’s cash flow growth?

After five straight years of growth, free cash flow fell 35%. But the numbers don’t tell the whole story. Last year was an unusual year for Altria.

Revenue grew 1.2%, while operating income grew 4.8%. However, the company owns more than 10% of the combined SABMiller and Anheuser-Busch InBev brands. When those two companies merged, Altria had to record a $13.8 billion gain, which led to a $5 billion tax increase.

Those higher taxes led to the drop in free cash flow.

If Altria had not recorded that gain and paid the taxes on it, free cash flow would have been higher in 2016 than it was in 2015, continuing its growth trajectory.

Wall Street expects free cash flow to be higher in 2017 and 2018, surpassing 2015’s total…

Last year, Altria paid out $4.5 billion in dividends. When free cash flow is only $3.6 billion, that’s a problem. The payout ratio is more than 100%. I like to see companies with payout ratios lower than 75% to feel comfortable that the dividend is safe.

This year, it is estimated that Altria will pay $4.9 billion in dividends. If the company generates the $6.2 billion in free cash flow that is expected, it covers the dividend but is still above my 75% threshold.

So the declining free cash flow from last year and the too-high payout ratio both hurt the company’s SafetyNet Pro rating significantly.

In its favor is its excellent 48-year track record of annual dividend increases.

If Altria hits its forecasted free cash flow numbers this year and next, it will likely get a big upgrade – especially since the lower cash flow numbers were due to a one-time merger, rather than a slowdown in business.

So the stock gets a low dividend safety rating for now, but I expect it to be higher in the near future.

Dividend Safety Rating: D

Good investing,

Marc

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Source: Wealthy Retirement