Altria (MO 1.19%) sells Marlboro cigarettes in the United States. It's an incredibly strong brand with a market share of 42.3% in the premium category. But that's about all the good news that Altria has going on today. Meanwhile, the lingering bad news, or at least the worst of the bad news, is what investors really need to pay attention to at this point.
Here's why Altria isn't likely to be a great long-term dividend stock for most investors.
The most important trend at Altria
It should come as no surprise to investors in Altria, or anybody else for that matter, that cigarettes are increasingly out of favor among consumers. The fact that they cause cancer, and an increasing array of alternative products, notably vapes, have drastically changed the perception of the product, which was once considered "cool."
Image source: Getty Images.
For example, in the third quarter, Altria's cigarette volume declined 11.6% year over year. Marlboro's volume dropped 10.5%. Through the first nine months of 2023 overall cigarette volume was off 10.5%, with Marlboro lower by 9.5%. Having the biggest premium brand is nice, but you can't ignore the fact that volumes are plunging.
This isn't new. Cigarette volumes fell 9.7% in 2022. They fell 7.5% in 2021. The drop in 2020 was a more modest 0.4% (Marlboro actually sold 0.4% more cigarettes in the year), but that was likely thanks to the impact of the coronavirus pandemic. The oddness of 2020 is highlighted by the fact that 2019 cigarette shipment volumes fell 7.3%.
NYSE: MO
Key Data Points
From a big-picture perspective, it seems like a bad idea to buy a consumer staples company that is seeing such a drastic and ongoing decline in its most important product. To give another view of the issue, the volume of cigarettes sold in the fourth quarter of 2019 was 23.1 billion. By the third quarter of 2023 that number had fallen to 19.3 billion, a nearly 16.5% drop.
Altria is dealing as best it can
There are two sides to this story: Volume is falling but the price per cigarette has been steadily increasing. Those price increases have allowed Altria to support its earnings and dividend-paying ability. In fact, despite the underlying weakness in a product that accounts for roughly 90% of its top line, Altria has increased its dividend annually for 14 consecutive years. That's clearly an attempt to attract income-oriented investors.
Then there's the dividend yield, which is a hefty 9.7%. At a time when the S&P 500 index is only yielding around 1.5%, that's a very attractive figure for dividend investors trying to maximize the income they generate from their portfolios. Altria's yield even stands up well against those of super safe income alternatives, like CDs which can net you 5% or so today. But don't forget about the risk of owning stocks, which is particularly important with Altria given the underlying business trends.
To be fair, the dividend is probably just fine for now. The company's most recent quarterly dividend payment was $0.98 per share (up two cents from the previous rate), and adjusted earnings tallied up to $1.28 per share in the third quarter. That's a payout ratio of 76.5%. However, income investors need to ask themselves how long Altria can walk the knife's edge as it looks to offset volume declines with price increases.
Tread very carefully and pay close attention
Altria's stock is down around 50% from the highs it reached in 2017. That's pushed the yield up to its current levels, but it is also a sign that investors do not have a favorable view of the company's future. A key driving force of the negativity here is the ongoing volume decline in the company's most important business.
Yes, you can collect a fat dividend that has been growing, but you may own a company that has gone from milking a cash cow to bleeding it dry. Most should avoid this business, but if you are tempted to buy it make sure to monitor the volume trends here very carefully. At some point product price increases probably won't be enough to offset the business' downward spiral.
