Altria (NYSE:MO) is a consumer products company with an industry leading position, a long history of annual dividend increases and a huge dividend yield of 8.5%. There are things to like here and at first glance it looks like this could be a millionaires’ stock. But there are big risks that investors should consider before buying.
Altria is a leader in an industry that is struggling
Altria’s main product is cigarettes. Although it only operates in the United States, it owns the most important cigarette brand with Marlboro. Marlboro alone accounts for 42% of the US cigarette market. That is huge and forms a solid basis for Altria’s activities.
The problem is that cigarette smoking is increasingly falling out of favor. For example, in the first quarter of 2024, Altria produced 10% fewer cigarettes than in the same period of 2023. That is not an anomaly; it is in line with the long-term trend. It’s fair to say that Altria has been able to offset the declines with price increases, which has supported Altria’s ability to continue raising its dividend.
The enormous dividend yield of 8.5% therefore does not appear to entail any risk in the short term. And if you put $100,000 into the stock today, that would generate a solid income of $8,500 per year. Meanwhile, the stock is still down about 40% from its 2017 highs. So there is recovery potential on top of the huge revenue stream. If shareholders chose to reinvest dividends, total returns would get a huge boost. All in all, there’s good reason to think Altria could be a millionaire’s stock if you owned it long enough.
The problem is that a lot depends on management’s ability to cope with continued declines in cigarette demand. Things aren’t going so well.
Altria is still shrinking
On the one hand, investors can point to the dividend growth as a sign that Altria has been successful in its attempt to deal with the changes in the cigarette industry. To some extent that is true, but this is not a long-term solution. At some point, price increases will likely exacerbate the decline, which could lead to a death spiral for the company. What management really needs to do is find a way to use the money it generates from cigarettes to build a new company that can eventually replace or at least complement cigarettes.
So far, management has invested in vape maker Juul and a marijuana company. Both investments came to nothing and resulted in massive write-downs that cost shareholders billions of dollars. Another big idea was to separate the American operations from the foreign companies that this created Philip Morris International (NYSE: PM). That alone ultimately created a competitor in the non-cigarette world that is now so important to Altria’s future.
Altria’s most recent attempt at finding a new business line was the purchase of NJOY, another vaping company. NJOY is further along in its development than Juul, so it seems like there is a better chance of success this time around. But given the continued missteps, even the most aggressive investors will want to keep a very close eye on NJOY’s results. That said, if NJOY represents a major turning point for Altria’s business, an investment in this consumer products maker could indeed help make you a millionaire. But that’s a big gamble, given past missteps.
Altria is not for the faint of heart
Investing is all about balancing risk and return. Theoretically, any stock could eventually become a millionaire, although most stocks won’t achieve that outcome. When it comes to Altria, the story is quite simple. The company has a dairy cow business that is in long-term decline. If it can use the money generated to build a new growth company, it could be an attractive investment. The problem is that the growth efforts so far haven’t worked out very well. Most investors will probably be better off elsewhere. Despite the enormous returns, the balance between risk and reward seems to be going in the wrong direction here.
Should You Invest $1,000 in Altria Group Now?
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
Can a $100,000 investment in Altria make you a millionaire? was originally published by The Motley Fool
