Tobacco giant Altria Group (MO 0.28%) recently gave investors an updated look at the company when it held an investor event in late March. Company management laid out some goals for 2028, though shareholders might have left the event with some unanswered questions. Altria followed this up with its first-quarter earnings report about a month later. This too was lacking some substance that some investors are looking for.
This investor doubt suggests the problems are getting bigger for this Dividend King. No, Altria's dividend isn't in trouble. For some investors, that's good enough. But Altria's lack of direction should make investors at least wonder if their hard-earned capital is better held elsewhere.
Here is what you need to know about this glaring red flag.
Altria's most important question remains unanswered
Most Altria shareholders know the drill. Altria's legacy tobacco business, headlined by its Marlboro cigarette brand, continues carrying water for the company, just as it has for many decades. The slow and steady decline of cigarette volumes hasn't stopped billions of dollars of dividends from filling investor pockets, but Altria knows the golden goose can't last forever.
Altria's management team has tried multiple times to develop a successful new business segment to take over, from its $12 billion Juul investment to its stake in cannabis company Cronos. Both of those deals have only wasted shareholder money. Altria teamed up with spin-off company Philip Morris International (PM -0.84%) to distribute its IQOS heated tobacco products in the U.S., only for that to also fail.
With Philip Morris International acquiring the Zyn nicotine pouch brand and set to sell IQOS in America next year, Altria's latest attempt is a $2.75 billion acquisition of electronic cigarette brand NJOY. That plus its version of nicotine pouches, called On!, will compete for the U.S. market. But that might not be enough to grow Altria over the long term, leaving investors wondering what else Altria has up its sleeve.
Management said at its investor event and in its Q1 earnings release that it aspires to compete in the international innovative smoke-free and non-nicotine categories. It's evaluating these opportunities and expects to finalize strategies for these growth areas over the next 12 months.
But, given all the other failed ventures, analysts and some investors have expressed doubts.
The dividend still goes a long way, but is it enough?
Almost as equally frustrating is the company's growth forecast through 2028, calling for mid-single-digit earnings growth. The company grew earnings per share (EPS) by 5.4% year over year in Q1 of 2023, so its guidance is essentially more of the same. The cigarette business will carry Altria forward.
Altria stock doesn't need to do much to be a worthwhile investment when the dividend is so big. The dividend yield is a high 7.9% at the current share price. Part of the reason for the elevated yield is that share price is down about 15% over the past year. Together, Altria's total return was a negative 6.5% over the past year (compared to a total return of 2.6% over the past year for the S&P 500).
The stock trades at a price-to-earnings ratio of 9.3, which seems fair for a company growing earnings by just 5%. Investors probably shouldn't expect a massive uptick in Altria's valuation unless something changes. The stock's dividend seems safe for now, but its payout ratio has been well above the long-term average for a couple of years now.
Investors shouldn't give management the benefit of the doubt
The company is entering a multi-year stretch with arguably the highest stakes Altria has faced in years. Management's lack of long-term plans only raises the pressure to keep IQOS and Zyn at bay.
Investors can buy or hold the stock for the dividend in the short term, but things could get interesting in 2024 when Philip Morris International and IQOS enter the U.S. market. Altria's nightmare scenario is that IQOS establishes itself in the U.S. and accelerates cigarette sales volume declines.
If management can't successfully position Altria for long-term growth, the company's traditionally reliable dividend, its most significant contributor to shareholder returns, could get turned on its head. Watch Altria closely over these next couple of years.
