There was a time when tobacco giant Altria Group (MO -0.37%) -- investors used to know it as Philip Morris -- seemed unstoppable. Smoking was common, with more and more people starting the habit.
Then sweeping smoking cessation efforts began. Although they got a slow start, their persistence is proving effective. The CDC reports the percentage of Americans who regularly smoke has fallen from 40% in the 1960s to a multi-decade low near 11% now. Presumably, that number will continues to dwindle.
Other types of tobacco usage are in similar decline, and vaping isn't exactly offsetting the tobacco market's contraction. The business has little hope for long-term growth.
And yet, Altria is still generating lots of revenue, and turning a great deal of it into profit. Altria stock is also still dishing out a dividend currently translating into a big yield of 8.2%, and should continue doing so into the distant future.
That's the basis for a very specific bullish case to be made for this otherwise unownable name.
Altria is making the best of an impossible situation
Altria's recently reported Q2 numbers are anything but thrilling. The company turned $6.5 billion worth of sales into net income of $2.1 billion during the three-month stretch ending in June, growing the top line by 1.2%. Operating per-share earnings of $1.31 improved by 4% from the year-ago figure of $1.26, extending comparable profit progress made during the first quarter (continued stock buybacks boosted the company's per-share metrics).
Those results mostly mirror its first-quarter growth. In fact, they more or less look the same as most of Altria's quarters for the past few decades. Inflation appears to be its top growth driver, even if it's driving costs higher as well.
MO revenue (quarterly) data by YCharts. The pronounced decline of revenue and operating income in 2007 and 2008 reflects the impact of 2007's spinoff of Kraft Foods.
The funny thing is, Altria is still making plenty of money to fund its dividend. Last quarter's per-share payout? Only $0.94, leaving a healthy amount of fiscal cushion for any potential future turbulence. The company's decades-long track record of dividend payments isn't in any immediate danger. Neither is its cadence of annual dividend increases.
MO normalized diluted EPS (quarterly) data by YCharts
This won't always be the case, mind you. There will come a time when the war on smoking (and on chewing tobacco, and on vaping) will make it impossible for Altria to continue producing the profits it's generating now. Even the company itself has trademarked the term "moving beyond smoking," acknowledging its inevitable future.
In the meantime, however, it can prolong the present by educating consumers about seemingly safer alternatives like smokeless tobacco, e-cigarettes, vaping, and nicotine pouches. By managing this transition to the obvious future, it may be able to slow the adverse fiscal impact of the shift. Altria's on! nicotine pouches saw a 48% year-over-year increase in unit shipments during the second quarter of the year, accelerating from the first quarter's growth pace.
Even then, though, the overall volume of smokeless tobacco shipments actually fell again last quarter, as did total cigarette shipments themselves -- by far still the company's biggest profit center. That decline extends a long-standing contraction too. For perspective, during the second quarter of 2018 the company sold nearly 27.3 billion cigarettes. Last quarter's figure was a much more modest 20.6 billion.
At best, Altria is simply swapping out sales of its legacy products for newer kinds of goods. More often than not, it's actually losing customers.
That 8.2% dividend yield
So what does it mean for interested investors?
Anyone looking for a safe growth name to turn into a lifetime holding can forget it -- Altria isn't for you.
While the company has already proven it can slow the impact of the smoking cessation movement, it can't prevent it; the alternative vices it's introducing may not be perceived as being any safer. It's only a matter of time before Altria as we know it will cease to exist. It's just not clear if whatever it's going to become in the future justifies the stock's present price.
On the flip side, if you already own a piece of the company or are looking for a high-yielding dividend payer, Altria is a healthy pick for your portfolio right now. That's especially true if current shareholders would create an unwanted taxable event by selling it at this time.
Just bear in mind it's a holding with a limited useful lifespan, even if the remainder of the lifespan is measured in years, if not decades. You don't want to be left holding it once the rest of the market starts realizing the tobacco business (and all of its offshoots) are shrinking faster than Altria can afford to repurchase shares and still pay its dividend.
