If you are an income-focused investor, a stock with a 9.5% dividend yield is probably enticing. Add in the fact that the dividend has been increased every year for over a decade and the story gets even better. Now consider that the stock in question, Altria (MO -0.37%), hails from the generally conservative consumer staples sector and you might be ready to back up the truck.
But don't buy in just yet -- there's more you need to know.
Altria is an industry-leading company
To give credit where credit is due, Altria is the name to beat in the North American cigarette market. Its Marlboro brand has a 42.3% market share, which is an incredible number. Overall the company's market share is around 47%. Think about that for a second -- nearly half of all cigarettes sold in the United States are made by Altria.
Image source: Getty Images.
And while you might not think highly of smoking yourself, cigarettes are addictive, so there is a very loyal customer base. That is why Altria falls into the consumer staples category, since its products are bought regularly regardless of what is going on in the world. This steady demand is what has allowed the company to continually increase its prices and steadily increase its dividend over time. These facts are key fundamentals that back the "buy" story with Altria.
But there's a negative understory here that you really can't ignore. Cigarette smoking is coming under increasing pressure socially and from new products like vaping. So while Altria is a giant in the industry, there are very real reasons to be worried about the long-term future here.
Most investors should stay away from Altria
Investors favor consumer staples companies because of their slow and steady growth trends. While Altria's dividend suggests that story holds here as well, the truth is that Altria's business is in decline. The ability to push price increases through to consumers is what helps keep the dividend on the growth path. But at some point, the company won't be able to keep hiking prices to offset the volume declines it is seeing because the prices themselves will begin to add to the shift away from cigarettes.
Some numbers help. In the third quarter of 2023, cigarette volume declined 11.6% year over year. That's a massive drop in a single year and should worry investors.
The problem is that it isn't at all unusual. In 2022 volume fell 9.7%. In 2021 the volume decline was 7.5%. Like it or not, consumers are smoking less, and it is impacting Altria in a notable and ongoing way.
The most recent quarterly update was important because Altria noted that "the growth of illicit e-vapor products" was a key headwind, something it hasn't said in the past. Illicit e-vapor products are probably priced more cheaply than Altria's cigarettes, suggesting that price is finally becoming a bigger problem.
To be fair, Altria is trying to build up its own vape business, having recently bought the NJOY brand. But it has attempted to diversify into new areas before and failed, costing investors billions in one-time write-offs. And even if NJOY succeeds where other attempts fail, it will only offset the ongoing declines in traditional cigarettes, which are roughly 88% of the company's business. That's just too big a number to easily be replaced.
Not for risk-averse investors
Simply put, buying Altria risks owning a company that appears very close to bleeding its cash cow to death. The dividend doesn't appear to be at any risk today, but the high dividend yield is a signal from Wall Street that there is material uncertainty here.
It isn't hard to see the problem when you examine the volume trends in the company's most important business. Most investors will probably want to err on the side of caution and avoid Altria.
