Tobacco giant Altria Group (MO +2.36%) has been one of the most durable companies in America. The Dividend King has increased its dividend payouts for 52 straight years, and the addictive properties of tobacco have empowered companies like Altria to slowly and steadily raise cigarette prices to make up for a smoking rate that has declined in the U.S. since the 1960s.
Today, we are in a high-inflation economy, where prices of food, gas, and other products are rising at their fastest rates in decades. While Altria's business can prove durable despite that challenge, investors should be at least concerned about how inflation might affect the company.
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Consider the finances of U.S. smokers
Studies have tracked tobacco users based on income brackets, and according to the U.S. Centers for Disease Control and Prevention, smoking is significantly more prevalent among people in lower-income households.
The median income for a U.S. household in 2020 was just over $65,000 per year. According to the CDC, more than 32% of U.S. households with annual incomes of $20,000 or less include smokers. Among those with incomes between $20,000 and $40,000, the share of households with smokers dips to around 26%. For households with incomes in the $50,000 to $99,000 range, the share with smokers falls even further to 18%, while just 12% of households with incomes of $100,000 or more include a smoker.
So while everyone is going to feel the impact of higher gas prices, more expensive groceries, and higher payments for vehicles and housing, the lower a person's earnings, the more today's higher prices are likely to impact their discretionary income. And the lower your household income, the more likely it is that you are among the customers of a tobacco company.
Will Marlboro be a budget cut for smokers?
Marlboro is Altria's flagship cigarette brand and the country's most popular cigarette. The company estimates Marlboro commands 43.1% of the overall retail market and 57.7% of the premium segment.
But smokers who are feeling financial pressure due to inflation could start switching to cheaper brands to save money. Marlboro is about 39% more expensive than Altria's lowest-priced brand, so it's clear that if a lot of smokers switched away from Marlboro, the result would hurt Altria's revenue and profits.
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Key Data Points
Can Altria handle people ditching Marlboro?
I don't want to give anyone the impression that Altria is in trouble. The company is a cash flow machine that turns a whopping $0.39 of every dollar of revenue into free cash flow, and most of that goes toward the company's large dividend. Altria's revenue was $26 billion in 2021. The tobacco giant is doing just fine.
Altria also has $4.5 billion in cash and equivalents on its books, so it has no shortage of financial security. But if prolonged inflation causes more people to downgrade to cheaper cigarettes, it might stunt some of Altria's strong cash flows.
This would likely trickle down to shareholders in the form of smaller dividend increases, fewer share repurchases, or an unwillingness by management to make strategic acquisitions. I'm not saying these are all things that should worry investors today, but it will be worth monitoring Altria's profit margins over the next several quarters to see if there are any signs of weakness. Marlboro has long been Altria's "golden goose" brand, so investors should take any potential threat to its sales seriously.
