The one number that likely stands out for income investors when they see Altria (MO -0.37%) is the stock's huge 9.37% dividend yield. That dividend, meanwhile, has been increased annually for 54 consecutive years. For investors looking to maximize their passive income stream, this may seem like a slam dunk.
It isn't, though, and you should monitor Altria's progress very carefully if you buy it, or you might end up with an unpleasant surprise.
Altria's dividend looks safe ... for now
To be fair, there's no particular reason to think Altria's dividend is at risk of being cut over the near term. That's true even though the payout ratio is roughly 100%. Payout ratio compares dividends to earnings, but dividends actually come out of cash flow, not earnings. Altria's cash dividend payout ratio, which compares dividends to cash flow, is a more reasonable 80% or so. The number has been fairly consistent over the past decade.
MO Payout Ratio data by YCharts.
Notably, Altria is a consumer staples company that sells a product with a high degree of customer loyalty. The product in question is cigarettes, which deliver the addictive substance nicotine, helping explain at least some of the loyalty here. But Altria also happens to own the biggest cigarette brand in the U.S. market: Marlboro. That brand alone has a huge 42% share of the U.S. market.
At this point, investors might think Altria sounds like a great dividend stock. The problem is that its cigarette business is in a long-term secular decline. Smoking cigarettes is decidedly out of favor today. You can't ignore this fact.
Altria sells a lot fewer cigarettes
Some numbers will help. In the second quarter of 2023, Altria sold roughly 21 billion cigarettes. A year earlier, it sold nearly 23 billion. So, the company's volume declined by around 8% in just one year. And this isn't a one-time event.
If you go back to the second quarter of 2018, five years ago, the company sold around 27.7 billion cigarettes. Thus, in five years, the company's most important business saw a volume decline of nearly 25%. That's a frightening figure that would suggest a fundamentally weak business.
Altria has been able to keep paying a growing dividend only because it has increased cigarette prices as volume has declined. Asking a dwindling number of customers to pay an ever-increasing price is not a sustainable long-term business model, even if it continues to work in the near term. The company will likely hit a tipping point eventually, and the price increases will start to exacerbate the volume decline.
The only solution is for management to find a new product that replaces the old one, which Altria has tried with marijuana and vaping, but both efforts failed to spark. It is trying again on the vaping front, with the recent purchase of NJOY, but given the past failures, investors would be wise to be leery here. At the very least, take a trust-but-verify approach.
There are no easy solutions for Altria
Altria's big dividend is there to attract investors to what would otherwise be seen as a company in slow and steady decline. There's a chance the company could find a new product to replace cigarettes, but so far, that plan hasn't worked out well.
The dividend looks safe for now, but given the ongoing drop in cigarette volume, dividend investors must carefully monitor Altria. At some point, the dividend just won't be attractive enough to justify the risk of owning a dying company. For many investors, that is likely to be the case already.
