Leading cigarette maker Altria Group (MO 0.12%) saw its net revenue drop 2.9% year over year in the first quarter of 2023, marking the fifth straight quarter of this happening. Net income in the period was also down 8.8%. So, it's clear the business is experiencing a rough patch.
The stock has been a disaster for investors, down 19% over the past five years while the S&P 500 has climbed 50% during the same period.
Does this mean it's time to sell Altria stock and move on? Or should investors stick with the stock -- and maybe even buy more -- in the hopes of a rebound?
Let's take a closer look at this top tobacco stock.
Reasons to buy and hold Altria stock
There's a lot to like about this business and for some people it is a stock worth buying and/or holding. Perhaps most important is how resilient and stable Altria is, especially in the face of uncertain macroeconomic conditions. Management mentioned that inflationary pressures have had no material impact on the company's operations as they relate to costs. Executives also highlighted steady brand loyalty even as discretionary spending for consumers is under pressure.
Selling products that are basically recession-proof clearly benefits Altria, as its sales don't fluctuate much even when money is tight.
Lately, Altria has been able to raise the prices on its products, a trait that famed investor Warren Buffett likes to see in the companies he considers buying. CEO Billy Gifford said on the Q1 2023 earnings call in late April that price elasticity is lower for Altria than other consumer packaged goods companies. This means that when it raise prices, demand doesn't drop off meaningfully. I'm sure many businesses would love this type of setup.
Pricing power and steady demand have made Altria an incredibly profitable enterprise. Over the past 10 years, the company's operating margin has averaged an amazing 49%. And this has allowed Altria to return a lot of cash to shareholders, paying $1.7 billion in dividends in the first quarter, essentially all of the company's earnings for the period. Paying a rising dividend is a focal point for the leadership team.
In fact, Altria has paid an increasing dividend for 53 straight years, making it a Dividend King. The current yield stands at 8.3%, which is certainly attractive to income-seeking investors. And for shareholders who might have purchased Altria stock years ago, when the share price was lower, the dividend might represent a sizable chunk of the initial purchase price.
Reasons to sell Altria stock
While the bullish case for the company certainly holds merit, investors need to pay attention to some important challenges facing Altria.
Most notably, the percentage of people who smoke in the U.S. is on the decline, from half of adults in the 1940s to 12.5% in 2021. While this is a positive for the health of the population, it's a major headwind that changes the reality for Altria's business and its growth prospects. Wall Street consensus analyst estimates reflect this dim view, as the forecast calls for revenue to increase at a compound annual growth rate of 1.8% between 2022 and 2027.
In an attempt reduce its dependence on smoking products, Altria invested nearly $13 billion in 2018 in e-cigarette company Juul to gain exposure to the vaping industry. Management constantly reassessed this huge bet and always came to the conclusion that the business had overpaid for Juul, at one point having written down the value of the asset by 95%. In the most recent quarter, Altria conducted a transaction that left it with zero economic interest in the e-cig company.
That deal for Juul didn't work out because the vaping industry is a big target for regulators. There are many restrictions on the sale of e-cigarettes, and for the smoking products that made Altria the business it is today, advertising has become a serious challenge. This adds a level of uncertainty and risk for shareholders because they can't really predict major law changes or fines that could happen in the future.
And for some investors, owning tobacco stocks might be out of the question for personal reasons. A valid argument can be made that a cigarette business is a net negative for society and owning the stock might be a nonstarter.
I think the negative factors far outweigh the positive traits for Altria. Even though this is a stable business that returns lots of capital to shareholders, the long-term trend of declining demand and the lack of meaningful growth opportunities would make me want to sell the stock.
