Altria (MO -0.37%) is operating a cash-cow business, effectively trying to get as much milk as it can from its cigarette sales while it can. That's not a bad plan. However, there's only so much milk you can get from the cow in these situations, and investors should probably be increasingly worried about the long-term prospects of Altria's dividend.
Cash cows and cash cows
Consumer staples giant Procter & Gamble (PG -0.78%) has a lot of cash-cow products. The list includes toothpaste, paper towels, toilet paper, and feminine hygiene products, among many others. It also has some iconic brands in its portfolio, like Bounty and Pampers, to name just two.
What sets it apart from so many of its peers is Procter & Gamble's ability and success with investing in its businesses to drive new product innovation and, thus, consumer demand. It has been able to milk these cash cows for a long time, and assuming it doesn't suddenly stop spending on research & development, it should be able to keep milking them for years to come, as well.
Image source: Getty Images.
Altria also has a cash-cow business, but the situation is very different. The smokeable products it sells accounted for about 87% of first-quarter sales. Cigarettes are, by far, the largest part of that division. This is the cash cow for Altria, which has a market share of 47% in the United States, with its Marlboro brand alone accounting for 42 percentage points of that total.
In some ways, it is very well positioned. Smokers tend to be loyal to their brands and to smoking in general, given the addictive nature of nicotine. The problem is that cigarettes are dangerous, unlike the types of things that Procter & Gamble sells, which are generally seen as healthy and helpful.
There's also the complication of strict government regulation around tobacco products, with the ultimate goal of reducing their use.
Altria has been milking its cash cow by simply raising prices without offering much more to consumers. The result, adding in the social changes around smoking, isn't shocking, but it should be worrying to investors.
Down, down, down
In 2018, Altria sold 109.8 billion cigarettes. That's a lot of smokes, but the number was 5.8% below what the company sold in 2017. Fast forward to 2022, and the total number of cigarettes sold falls to 84.7 billion units. That was a year-over-year decline of 9.7%. However, it was nearly 23% below the number sold in 2018, just five years earlier.
That's a significant drop, but it really gets worrying when you look at the year-by-year numbers.
|
2018 |
2019 |
2020 |
2021 |
2022 |
|
|---|---|---|---|---|---|
|
Percentage Decline in Cigarette Volume |
-5.8% |
-7.3% |
-0.4% |
-7.5% |
-9.7% |
Data source: Altria
Aside from 2020, which was impacted by the coronavirus pandemic, the declines are all mid-to-high single digits. That's an unsustainable trend over the long term. Altria can't continue to rely on its cash cow forever because it isn't milking it -- it looks more like it is bleeding it dry.
In fairness, management is aware of the problem. It has been looking for new sources of revenue, including forays into the vaping space and marijuana. The problem is that, so far, Altria's efforts to diversify its business haven't been very successful. In fact, major vaping and marijuana investments have only left shareholders with billions of dollars of write-offs.
The company is trying again with vaping, with investors left to hope that the second time is the charm. In fairness, Njoy, the company Altria acquired, has a more developed product portfolio than its previous investment in the space (Juul). So it is reasonable to assume there's a higher probability of success, but execution still hasn't been strong overall for Altria.
A high-risk yield
Altria's dividend yield is 8.1% for a reason. That reason is that its biggest business is in fairly rapid decline, even though price increases have offset the pain financially. At some point, the volume declines will be too deep, and the company's dividend-paying ability will become tenuous.
You probably wouldn't buy shares of a consumer staples company like P&G if its biggest businesses were hemorrhaging like Atria's cigarette operation. Long-term dividend investors should tread carefully; the fundamental story here is pretty ugly.
