Shares of Altria(NYSE:MO) have had a great run this past year, gaining over 30% in value. The Q3 2024 earnings particularly excited investors, with shares rebounding sharply after the release. But is Altria’s business really that good? To answer that question, you have to dig into the numbers a bit. But you only have to scratch the surface before you realize that the long-term picture may not be as good as management would have you believe.
It’s important to take a step back and understand the core businesses in which Altria operates. Through the first nine months of 2024, the company generated approximately $18 billion in revenue. Of that total, smokable products brought in $15.9 billion in revenue, or about 88% of the total. Smokable products include both cigarettes and cigars, with cigarettes accounting for approximately 98% of the volume. Within the cigarette sector, the Marlboro brand accounted for just over 90% of the volume. All this very clearly leads to the fact that Altria is a high-end brand cigarette manufacturer.
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But right now, Altria is spending a lot of time highlighting the NJOY vaping business it recently acquired. It’s the first ‘division’ discussed in detail in the company’s Q3 2024 earnings release. It makes sense for Altria to emphasize the positives. And there are big positives about NJOY, but you have to take them with a grain of salt.
For example, in the third quarter, NJOY’s consumables volume increased 15.6% compared to the same quarter a year ago. NJOY device shipments increased by over 100%! And NJOY gained 2.8 share points in its product category year over year. That’s all very good news, but NJOY works from a small base. Just by connecting NJOY to Altria’s distribution system, a rapid performance improvement can be expected. In other words, the product’s growth is good news, but given the situation, it’s not surprising news in any way.
MO chart
This is where investors need to be more critical. The company celebrates its best qualities while trying to downplay its worst. And while NJOY is a bright spot, it’s so small that the revenue it generates is classified as “other.” The “other” category on the income statement, for reference, accounted for far less than 1% of revenue in the third quarter, despite all that growth in NJOY management that investors were talking about. It’s not even a rounding error.
In fact, all that growth at NJOY apparently didn’t help Altria’s sales at all in the first nine months of the year, as total sales fell 2.5% year over year during that period. The reason is also very easy to understand when you look at where most of Altria’s revenue is generated. This is still a premium cigarette company. Period. Difficult to stop. NJOY is a great story, but it just doesn’t make sense right now, and it will likely be a long time before it is meaningful enough to offset the continued declines in the company’s cigarette business.
To put a figure on the decline, Marlboro volume fell 7.5% in the third quarter and fell 9.4% in the first nine months of 2024. Altria’s non-Marlboro brands performed even worse. But here’s the key takeaway: Even regular price increases weren’t enough to offset the blow from volume declines in the first nine months of 2024.
The problem from an investor’s perspective is that Altria pays a huge 7.5% dividend yield, which is a siren call for dividend investors. It can support those returns for now, despite continued declines in its key industry. But long-term dividend investors should wonder how long this can last, since the replacement product that Wall Street is so excited about is still only a small part of Altria’s business.
If you decide to buy Altria, make sure you watch the stock like a hawk. However, most investors will probably be better off looking elsewhere for reliable passive income.
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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.
Altria shares rose, but is the stock a buy? was originally published by The Motley Fool
