The S&P 500 has declined nearly 20% this year as inflation, rising rates, and other macro challenges rattled the markets. Shares of many companies that were trading at higher valuations, racking up losses, or shouldering too much debt suffered even steeper declines. However, that sell-off also drove investors toward more conservative blue-chip dividend stocks.

One such stalwart was Altria (MO 0.28%), the largest tobacco company in the United States. Its stock only dipped about 2% for the year, and generated a positive total return of nearly 6% after factoring in reinvested dividends. It still pays a hefty forward yield of 8% and trades at just 9 times forward earnings. So should investors still invest in Altria today?

A person smokes a cigarette outside.

Image source: Getty Images.

Understanding Altria's business model

Altria's flagship brand Marlboro controls more than 40% of the U.S. cigarette market. Combined with its other brands, Altria controls nearly half of the entire market. However, Altria might seem like a weak investment because domestic smoking rates have been declining over the past several decades. It also faces intense competition from British American Tobacco's Reynolds American brands in that shrinking market.

Altria counters all that pressure by raising its prices, cutting costs, and repurchasing its shares to boost its earnings per share (EPS), so it can usually grow its EPS every year even as its sales growth remains sluggish. To reduce its long-term dependence on cigarettes, Altria has also been diversifying its portfolio by selling cigars, snus, nicotine pouches, and e-cigarettes. It also previously sold Ste. Michelle Estates wine before divesting that division for $1.2 billion in 2021.

Altria considers e-cigarettes to be a major growth market, but it's expanded into that market in fits and starts. It initially sold its own MarkTen and Green Smoke e-cigarettes, but discontinued both brands in late 2018 upon acquiring a 35% stake in the domestic market leader Juul for $12.8 billion instead. However, the value of that investment subsequently plummeted after the Food and Drug Administration (FDA) banned Juul's products in mid-2022.

Altria then partnered with its overseas counterpart Philip Morris International (PM -0.83%) to sell its iQOS heated tobacco products (which heat up tobacco sticks instead of burning them) to the U.S. market. But that deal expires next April, and PMI will pay Altria $2.7 billion ($1 billion of which has already been paid) to end the partnership. Altria plans to launch its own first-party e-cigarette brand in the near future, but it hasn't provided many details regarding that upcoming product.

Can Altria maintain its difficult balancing act?

Altria's price hikes, cost-cutting measures, and buybacks enabled it to generate consistent earnings growth over the past three years, but its revenue growth is decelerating and its market share continues to shrink.

Metric

2020

2021

Q1-Q3 of 2022

Revenue Growth Net of Excise Taxes (YOY)

5.3%

1.3%

(2.6%)

Adjusted* Cigarette Shipments Growth (YOY)

(2%)

(6%)

(9.5%)

Total Retail Market Share

49.2%

48.8%

48.1%

Adjusted EPS Growth (YOY)

3.6%

5.7%

4%

Data source: Altria. YOY = Year over year. *Adjusted for trade inventory movements and other factors.

In its third-quarter report in October, Altria said discretionary spending on tobacco products "remained under pressure as elevated gas prices and high inflation persisted." That warning indicates that Altria isn't as resistant to inflation as other consumer staples giants like General Mills or PepsiCo, which sell far less controversial products than Altria.

Altria's declining cigarette shipments and market share losses could persist for the foreseeable future in this tough market. It will keep repurchasing its shares to boost its EPS, but it's already spent more than 100% of its free cash flow (FCF) of $8.09 billion over the past 12 months on buybacks ($2.15 billion) and dividends ($6.57 billion). If Altria fails to stabilize its top-line growth, it could eventually need to rein in its buybacks or dividends as its FCF declines. 

For now, Altria expects its adjusted EPS to rise 4.5%-4.6% in 2022. Analysts expect its earnings to grow 5% this year and 4% in 2023. Those stable near-term growth rates have turned Altria into a safe haven stock in this bear market -- even though it faces long-term challenges -- and it could hold steady until inflation is reined in and interest rates stabilize again.

Is it the right time to buy Altria?

Altria might be a safe place to park your money, but it could lose its luster once the bear market ends. When a new bull market starts, investors will likely dump tobacco stocks like Altria and buy more promising growth plays instead. I believe Altria is a stable investment for now, but it has a very low chance of outperforming the S&P 500 over the long term.