If you are a dividend investor, there are some very prominent facts that should attract you to Altria (MO -0.37%). For example, the company has an ultra-high 8.8% dividend yield, and the dividend has been increased annually for more than a decade (the most recent hike was announced at the end of August).
But smart investors that have long time horizons should consider at least two concerning issues about Altria before they buy.
1. Altria's main product is heading south
Altria's biggest brand is Marlboro. Its biggest product is cigarettes. That information should be enough to turn off investors with an ESG bent, given how dangerous smoking is to human health. But this issue is bigger than investment preferences. There is a broad societal shift away from smoking. Since smokable products make up roughly 88% of the company's revenue, most of which is cigarette-related, this is a very big deal.
Image source: Getty Images.
Some more numbers will help here. In the second quarter of 2023, the number of cigarettes Altria sold fell 8.7% year over year. That's a huge decline. But it is just one quarter. In 2022, Altria produced 84.7 billion cigarettes (which was down 9.7% from 2021). In 2012, the consumer staples company produced 134.9 billion units. In one decade, Altria's most important product witnessed a volume decline of 37%. That is not a sustainable trend.
Because of the nature of tobacco, which is addictive, Altria has a very loyal customer base. It has been offsetting volume declines with price increases, which has allowed it to continue increasing the dividend. But eventually, the volume decline will be so large that price increases won't be enough to keep up with the ongoing drop in demand.
MO Dividend Per Share (Annual) data by YCharts.
2. Altria hasn't been able to find a new growth engine
To be fair, it isn't uncommon for consumer staples companies to have cash cow businesses on which they build out a broader portfolio of products. Food makers do this all the time. And, sometimes, the original cash cow becomes less and less important as the new businesses increase in size. Only Altria hasn't been able to find a business that's capable of replacing cigarettes.
It tried investing in the marijuana sector and ended up taking massive write-downs. It tried buying into the smokeless tobacco space, but that flamed out (requiring more write-downs). The company is again trying to gain a foothold in smokeless tobacco with its recent purchase of NJOY. NJOY has regulator-approved products, so this time may be different. But management's history with cigarette alternatives isn't great.
Here's the thing. Even if NJOY turns out to be a winner, the growth it achieves will be off a small base. So, it is likely that the product line will only partially offset the losses in cigarettes. It is far from clear that NJOY will ever be large enough to fully replace the company's giant tobacco operation. For investors looking to live off of the income their portfolios generate, betting that this time will be successful probably isn't worth it.
The risk/reward balance on Altria is skewed in the wrong direction
Altria has a storied history, a big yield, and a highly attractive brand, and it has regularly increased its dividend for years. But the business today just isn't what it used to be. The dividend is probably safe for a while longer, but it is hard to suggest that this is a set-it-and-forget-it stock. At some point, the decline in the company's main product will become untenable, which will likely put the dividend at risk even if the NJOY investment works out well. If you think in decades, Altria isn't a great option for your portfolio.
