Altria Group (MO -1.48%) is a leading player in the tobacco industry, and its stock has long been a go-to for investors seeking high dividend yields. On the other hand, the company's core business is facing some serious headwinds -- and some of its biggest growth bets haven't been panning out.
If you're thinking about investing in the tobacco giant and wondering what comes next for the company, read on for bull and bear cases on the stock presented by two Motley Fool contributors.
The bear case for Altria
Rich Duprey: As an Altria shareholder, I may seem an odd choice to offer a bearish opinion on it, but it's because of that holding that I can see why investors may be -- or perhaps ought to be -- cautious before investing in this tobacco stock. So here are the big three reasons I think an investor should be bearish about Altria.
1. Juul's downfall: While the ban of Juul Labs' e-cigarettes from the U.S. market has been temporarily put on hold by an appeals court, Altria's $13 billion investment in the company is still all but worthless. Juul's e-cig has lost tremendous market share since it became the focus of the Food and Drug Administration's campaign against teenagers vaping. Where it once held 75% of the market, Juul is now in second place with a 29% share, and fading behind British American Tobacco's (BTI -1.37%) Vuse brand. True, the federal appeals court did order the agency to review Juul's application again, but the damage has already been done.
2. Likely loss of its partnership with Philip Morris: The marketing and distribution agreement between Altria and Philip Morris International (PM -0.88%) will undoubtedly come to an end now that its IQOS heated tobacco device has been banned from being imported into the U.S. While the global tobacco company is looking for ways to do an end run around the U.S. International Trade Commission's decision, Philip Morris has agreed to buy top nicotine pouch producer Swedish Match (SWMAF), whose Zyn brand directly competes against Altria's own On! brand. If Philip Morris chooses to enter the U.S. market with a future e-cigarette product, it will have its own, so it will no longer need Altria.
3. Declining tobacco market. It's no secret that cigarette smoking is in a secular decline, and while the addictive qualities of nicotine give it a captive audience, which allows it to raise prices at will and remain profitable, the stigma of smoking is not going away. Moreover, inflation is driving some consumers to switch to lower-priced brands. So even though Altria's Marlboro brand still controls nearly half of the cigarette market, its dominance continues to erode.
I may still like Altria for my own portfolio, but there's a very strong case to be made against buying this sin stock.
The bull case for Altria
Keith Noonan: Regulatory pressures and other factors have led to massive writedowns on Altria's $12.8 billion investment in vaping specialist Juul, and it seems unlikely that unit sales volumes for cigarettes will return to growth any time soon. However, there's still a lot to like about this stock at current prices. The company's brand strength and the addictive nature of its products give it pricing power and should continue to ensure solid sales and earnings performance. Even better, there's not much more downside to that big Juul investment, and it's still possible that the vape company will emerge from the mire of public and regulatory pressures to post performance that's better than the market's basement-level expectations.
For a relatively stable consumer-goods business, Altria offers a dividend profile that's tough to beat. At the current share price, the company's dividend yields roughly 7.9%, and it has a stellar payout-growth pedigree. Altria has increased its annual payout for 53 years consecutively, placing it among the ranks of Dividend Kings, and the business's impressive free-cash-flow generation suggests it's in a good position to continue delivering reliable payout increases.
In today's volatile market, there's a lot to like about non-prohibitively valued stocks that can reliably generate big yields. With management guiding for earnings growth between 4% and 7% this year and shares trading at roughly 9.5 times this year's expected earnings, Altria stock stands out as a worthwhile, low-risk buy for income-seeking investors.
Should you buy Altria stock today?
For investors who are open to investing in sin stocks, Altria's reasonable valuation and strong dividend profile could make the stock an attractive income-generating vehicle in today's volatile market. On the other hand, sales volumes in the company's core tobacco business will likely continue to decline over the long term, and its biggest efforts to diversify into the e-cigarette market have produced disappointing results.
For the near term, Altria shares offer an impressive dividend yield and should prove relatively sturdy in the event of more turbulence for the broader market, but investors should still keep the company's long-term risks in mind.