When most investors look at it Altria (NYSE:MO) what they see is a huge dividend yield of 8%, supported by a dividend that has been increased for years. That’s the kind of story most dividend investors will find attractive. But there is a big risk here as the company’s core business declines in the long term. You need to understand that risk, but there’s another subtle twist you may have overlooked.
Altria’s business is slipping away
It should come as no shock to Altria shareholders that the company’s main business is cigarette production. In the first half of 2024, the company generated approximately $11.8 billion in revenue. The smokable products division’s sales were approximately $10.4 billion, or 88% of the company’s total sales. It’s clear that smokable products are the driving force at Altria.
To be fair, the company sells a variety of smokable products, including cigars. But if you look at volume, cigarettes account for just over 97% of the division’s volume. So cigarettes are the big story at Altria. But as mentioned, most investors know that fact.
The important story here isn’t the biggest company. It is the decline that is happening in the largest companies. During the first six months of 2024, cigarette volumes fell by 11.5%. That’s terrible and would probably be considered shocking at any other consumer goods company: investors would run for the mountains. Only that decline is just normal.
In 2023, cigarette volume fell by 9.9%. In 2022, volumes fell by 9.7%. In 2021, the decline was 7.5%. You get the idea: this is a dying company.
One “minor” problem that should not be overlooked
How has a company with a business in decline managed to maintain its dividend, let alone grow it? The answer is that, due to the nature of cigarettes, smokers tend to be very loyal. That’s why Altria has regularly raised prices to compensate for volume declines. That’s worked out well so far, but you can only milk a cash cow so hard before it runs dry. That’s a bigger risk for Altria than many may realize.
Of the cigarettes Altria sells, only about 4% fall into the discount category. This means that Altria’s activities are basically dependent on high-quality smoking products. In the premium category, the ‘other premium’ brands represent approximately 4.5% of the total volume. The remaining 91% of the company’s cigarette volume is all attributable to one brand, Marlboro.
Marlboro is a giant in the American cigarette industry with a huge market share of 42%. This could be seen as a strength. But take a step back and think about the big 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 increasing. Altria itself notes that “the growth of illegal e-vapor products” is a major problem, largely because they are less expensive.
Solving the problem won’t be easy
There’s only so much Altria can do about its dependence on Marlboro as cigarette business declines. In fact, being the biggest player in the industry is probably preferable to having a second sports brand. What it is doing is trying to expand its reach beyond cigarettes. This is the right decision, but given the size of the company’s cigarette business, finding a replacement will not be easy. After a number of failed attempts, including an investment in Juul and in a marijuana company, Altria is currently focused on expanding its recent acquisition of NJOY vapes.
Things are going well, with NJOY experiencing rapid growth now that it has been absorbed into Altria’s impressive distribution system. To put a number on that, in the second quarter of 2024, NJOY’s shipping volume increased by 14.7% compared to the first quarter and the number of NJOY devices increased by 80%. The problem is that NJOY is small and falls into Altria’s “all other products” revenue category, which brought in just $22 million in revenue in the first half of 2024 for a company with nearly $11.8 billion in revenue. NJOY is therefore hardly a rounding error. Marlboro is the key to Altria’s future and will likely remain so for years to come.
If Altria reaches a tipping point, things could get bad quickly
A consumer goods company can only raise prices so far before there is a consumer backlash. The easy switch from cigarettes is to buy cheaper smoking products, which Altria really doesn’t sell. Then there are alternatives to worry about, such as the company’s highlight, vaping. Although Marlboro holds its own, its market share in 2021 was 43.1%. That is 1.1 percentage points above the current level.
If Marlboro falters, Altria may fall. This is a ‘little’ fact that many investors probably don’t take into account when looking at the enormous dividend yield. In short, there is a greater concentration risk here than many people realize.
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Reuben 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.
Think you know Altria? Here’s 1 little-known fact you can’t overlook. was originally published by The Motley Fool
