Investors looking for high-yield stocks may be attracted to Altria's (MO -0.37%) massive 9.6% dividend yield. With 14 consecutive years of annual dividend increases backing that yield, it would seem that it was a safe income stream. Don't count on it. There's a big problem with Altria's business, and a subtle wording shift in the current quarter's earnings release should be very troubling to investors.
The first big problem facing Altria
It should be no surprise to anyone that smoking cigarettes is not a healthy life choice. Cancer is the big illness that gets most of the attention, but there are plenty of other problems that crop up as well, including emphysema, now more commonly called COPD (chronic obstructive pulmonary disease). But nicotine is additive and people continue to smoke despite the health risks.
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That said, there is a long-term decline in smoking that has been hurting demand for Altria's cigarettes for years. For example, in the third quarter the volume of cigarettes the company sold declined 11.6% year over year. That comes after declines of 9.7% in 2022, 7.5% in 2021, 0.4% in 2020 (an unusual period because of the pandemic), and 7.3% in 2019. Between the fourth quarter of 2019 and the third quarter of 2023, the volume decline has been about 16.5%. That's a terrible trend given that cigarettes make up roughly 90% of the top line of Altria's income statements.
To combat the ongoing decline in volume, Altria has been steadily increasing its prices. That's how it has managed to keep supporting a massive dividend despite the worrying underlying weakness in its business. The key issue for long-term dividend investors is figuring out how long it can keep raising prices in the face of declining volumes before something breaks.
The next big problem facing Altria may have just reared its ugly head
To figure out what's going on, investors need to read between the lines a little bit. For example, in the second quarter, management noted that, "Smokeable products segment reported domestic cigarette shipment volume decreased 8.7%, primarily driven by the industry's decline rate and retail share losses (both of which were impacted by macroeconomic pressures on ATC disposable income), partially offset by trade inventory movements." That's basically the same thing the company said in the third quarter of 2022 and is what has been going on for years, as noted above in the declining volume figures.
But in the third quarter of 2023, the statement about the causes of the volume declines was updated to include this wording: "the growth of illicit e-vapor products." This is a bigger issue than it may at first seem.
The fact that consumers are switching from cigarettes to vape products isn't new. In fact, Altria has tried to break into that market. Its first attempt (with an investment in Juul) was a failure, and it is now trying again. So it is working on the broad issue, but the most important word in the new statement could be "illicit." The branded products Altria sells are expensive and the shift toward "illicit" products could be an indication that consumers are starting to push back against the company's ongoing price hikes. If that's the case, further price hikes would only exacerbate the spiral and further imperil the dividend.
Trading down is nothing new
For a consumer staples company to deal with customers trading down to cheaper fare in the face of price increases is not a new thing. But Altria's products have historically afforded it a great deal of pricing power because of both brand loyalty and the addictive nature of the product. But if the third quarter word change on the volume decline indicates that Altria's customers have been pushed too far, the future could be increasingly ugly for the company and its investors.
Dividend investors need to be paying extra close attention right now. If volume declines speed up, Altria is in deep trouble. Cutting prices to stem the volume decline, meanwhile, may not do much to help sales, or dividend security, given a lower price per cigarette will translate into weaker sales just like a volume decline would.
