When most investors look Altria (NYSE:MO) What they see is a whopping 8% dividend yield backed by a dividend that has been increasing for years. That's the kind of story most dividend investors will find attractive. But there is a big risk here because the company's core business is in long-term decline. You have to understand that risk, but there is another subtle twist that you may have overlooked.
Altria's business is slipping away
It should come as no surprise to Altria shareholders that the company's most important business is making cigarettes. In the first half of 2024, the company generated approximately $11.8 billion in revenue. Revenue from its smokeable products division was about $10.4 billion, or 88% of the company's total revenue. Clearly, smokable products are Altria's driving force.
To be fair, the company sells a variety of smoking products, including cigars. But if you look at the volume, cigarettes represent just over 97% of the division's volume. So cigarettes are the big story at Altria. But, as noted, most investors know that fact.
The big story here is not the biggest deal. It is the fall that is occurring in the largest business. During the first six months of 2024, cigarette volumes fell by 11.5%. That's terrible and would probably be seen as shocking on anyone else. consumer staples company — investors would flee to the hills. Only that drop is par for the course.
In 2023, cigarette volume decreased by 9.9%. In 2022, volumes fell by 9.7%. In 2021, the drop was 7.5%. You get the idea, this is a dying business.
A “small” problem that cannot be ignored
How has a company with a declining business managed to maintain its dividend, let alone increase it? The answer is that, due to the nature of cigarettes, smokers tend to be very loyal. That's why Altria has been raising prices regularly to offset volume declines. That's worked well so far, but you can only milk a cash cow so far before it dries up. That's a bigger risk for Altria than many realize.
Of the cigarettes Altria sells, only about 4% fall into the discount category. That means Altria's business basically depends on premium cigarettes. In the premium category, “other premium brands” account for around 4.5% of the total volume. The remaining 91% of the company's cigarette volume is attributable to one brand, Marlboro.
Marlboro is a giant of the American tobacco industry with a whopping 42% market share. This could be seen as a strength. But step back for a second and think about the bigger picture. Altria is basically a one-trick pony in a dying rodeo. And its pony is one of the most expensive around at a time when price competition from smoking alternatives is intensifying. Altria itself notes that “the growth of illicit e-vapor products” is a big problem, which is largely due to them being less expensive.
Solving the problem will not be easy
There's a lot Altria can do about its dependence on Marlboro as the cigarette business declines. In fact, being the biggest player in the industry is probably preferable to having a second-tier brand. What it is doing is trying to expand its reach beyond cigarettes. This is the right thing to do, but given the size of the company's cigarette business, it won't be easy to find a replacement. After a couple of failed attempts, including an investment in Juul and a marijuana company, Altria is currently focused on growing its recent NJOY vaporizer acquisition.
All is going well, and NJOY is experiencing rapid growth as it integrates into Altria's impressive distribution system. To put a number on it, in the second quarter of 2024 NJOY shipment volume increased by 14.7% compared to the first quarter and shipments of NJOY devices increased by 80%. The problem is that NJOY is small and falls into Altria's “all other products” revenue category, which accounted for just $22 million in revenue in the first half of 2024 in a company with nearly $11.8 billion. dollars in income. So NJOY is hardly a rounding error. Marlboro is the key to Altria's future and will likely continue to be the key for years to come.
If Altria reaches a tipping point, things could get worse quickly
A consumer staples company can only raise prices so much before there is a consumer backlash. The easy switch with cigarettes is to buy cheaper cigarettes, which Altria doesn't really sell. Then there are alternatives to worry about, like vaping, the company's highlight. Although Marlboro has held firm, in 2021 its market share was 43.1%. That's 1.1 percentage points above its current level.
If Marlboro falters, Altria could fall. This is a “small” fact that many investors are probably not considering when looking at the huge dividend yield. Basically, there is a greater risk of concentration here than many people realize.
Should I invest $1,000 in Altria Group right now?
Before you buy Altria Group stock, consider this:
He Varied and Dumb Stock Advisor The analyst team has just identified what they believe are the 10 best stocks for investors to buy now… and Altria Group was not one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when NVIDIA made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $743,952!*
Stock Advisor provides investors with an easy-to-follow success plan, including guidance on how to build a portfolio, regular analyst updates, and two new stock picks each month. He Stock Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns from September 23, 2024
Ruben Gregg Brewer 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.
Do you think you know Altria? Here's a little-known fact that you can't ignore. was originally published by The Motley Fool