Altria (MO -0.49%), the largest tobacco company in America, was once considered a sound investment for conservative income investors. But over the past five years, Altria's stock has declined nearly 30% and erased all its dividend gains. Let's look back at why Altria lost its momentum, and whether or not value-seeking investors should bet on a long-term recovery for this company.

A brief history of Altria's troubles

Altria, formerly known as Philip Morris, became a fully domestic company after spinning off its international division as Philip Morris International (PM 1.02%) in 2008. Adult smoking rates in America fell from 20.9% to 13.4% between 2005 and 2018, according to the Centers for Disease Control and Prevention, making it increasingly difficult for Altria to sell its top cigarette brands like Marlboro. Rising excise taxes on cigarettes in states across America exacerbated that pain.

A young woman refuses a cigarette.

Image source: Getty Images.

Altria tried to counter that slowdown with three main strategies. First, it repeatedly raised its cigarette prices to offset lower shipments. Second, it aggressively cut costs and repurchased shares to squeeze earnings growth from its anemic revenue growth.

Lastly, it expanded beyond cigarettes by acquiring smokeless tobacco maker UST, the winemaker Ste. Michelle, and stakes in cannabis company Cronos Group and the e-cigarette maker Juul. Its $12.8 billion investment in Juul, which was overshadowed by safety issues and tightening regulations, resulted in a disastrous $4.5 billion write-down last year.

Altria continues to diversify its portfolio by bringing Philip Morris International's iQOS heated tobacco devices to the U.S. market. But despite all those efforts, Altria still generated 86% of its revenue, excluding excise taxes, from smokeable products in the first half of 2020.

Can Altria continue its long-term balancing act?

Altria's revenue, excluding excise taxes, dipped 1% in 2019. Its adjusted shipments of cigarettes, which exclude trade inventory movements and other factors, fell 7% due to the overall industry's decline and retail share losses to rival brands.

Its total share of the domestic retail cigarette market dipped from 50.2% in 2018 to 49.7% in 2019, as Marlboro, its premium brands, and discount brands all posted year-over-year declines. That pressure indicates that Altria's biggest domestic rival, British American Tobacco's (BTI -0.46%) Reynolds American, is gaining ground with U.S. smokers.

However, buybacks and cost-cutting measures still boosted Altria's adjusted EPS to $4.22 per share, which easily covered its annualized dividends of $3.36 per share.

In the first half of 2020, Altria's revenue, net of excise taxes, grew 5.5% year-over-year -- even though its adjusted cigarette shipments slipped 3% and its total market share fell year-over-year from 49.9% to 49.1%.

Its revenue was mainly boosted by calendar differences, consumers stocking up during the pandemic, and price hikes, instead of a sustainable long-term recovery in its core business. Meanwhile, continued cost-cutting measures boosted its adjusted EPS 8.5% to $2.18, even after it temporarily suspended its buybacks in late April.

Altria didn't provide any revenue guidance for the full year, but it expects its cigarette shipments to decline 2%-3.5% and for its adjusted EPS to rise 0%-4%. Analysts expect its revenue to rise 4% and 2%, respectively, for the year.

Is the 8.9% dividend worth it?

Altria's stock looks cheap at just eight times forward earnings, and it recently raised its dividend for the 55th time over the past 51 years (excluding its spin-offs of Kraft and PMI) to an annualized rate of $3.44 per share -- which equals a whopping forward yield of 8.9%.

That low valuation and high yield might limit Altria's downside potential, but investors seem to be ignoring the company's near-term balancing act and focusing on its long-term declines.

A comparison of Altria's stock price and its total return, which factors in reinvested dividends, clearly indicates it's a high-yield trap, and that it has repeatedly erased investors' dividend gains with its stock price declines:

MO Chart

Source: YCharts

Investors shouldn't solely judge a company by its past performance, but the future also looks grim for Altria. It will gradually run out of room to cut costs and raise its cigarette prices for a shrinking market, and its haphazard expansions into the cannabis, e-cigarette, and heated tobacco markets could simply burn cash without generating any meaningful revenue growth.

Stick with stocks with brighter futures

Altria will likely keep treading water over the next few years, but its long-term problems could keep offsetting its dividend growth. Therefore, income investors should stick with more promising dividend stocks for now, no matter how tempting the tobacco giant's yield and valuation might initially seem.