Most people know the dangers of cigarette smoking. For better or worse, tobacco companies have addictive products and loyal customers.
According to the World Health Organization, 1.3 billion people smoke, with 80% of them living in low- and middle-income countries. Roughly 28 million smokers live in the U.S., according to the Centers for Disease Control and Prevention.
But the industry has been changing. If you can put aside any moral qualms you might have about owning a tobacco company, should you purchase Altria Group's (MO -0.37%) stock? To make that decision, it's important to look at the industry and company fundamentals.
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Altria stock pays a high yield
Altria's stock offers a tempting 9.5% dividend yield compared to 1.5% for the S&P 500. The board of directors has raised dividends annually for over half a century. That includes an over 4% hike to October's payment to $0.98.
It's shown a willingness to raise dividends, and it's a priority. But when dividend yields get high, it could mean the company will cut the payout. Altria has a 77% payout ratio, which is high but doesn't indicate an imminent reduction.
When looking at free cash flow, the company generated $5.9 billion for the first nine months of the year. That's sufficient to pay the $5 billion in dividends. Hence, based on the payout ratio and free cash flow, Altria doesn't seem likely to cut the dividend anytime soon.
Dealing with lower volume
Altria generates most of its revenue from smokeable products. This segment primarily consists of selling cigarettes. It accounted for 89% of the top line for the first nine months of the year, with oral tobacco products representing the balance.
Unfortunately for the company, Altria's cigarette volume keeps falling. Altria shipped 58.1 billion cigarettes this year, down 10.5% from a year ago. Its market share, while an impressive 47%, has been falling. It had a 48.7% share at the end of 2021.
While management has been implementing price increases, it hasn't been enough to offset softer cigarette volumes. Altria's third-quarter revenue dropped by 4.1% to $6.3 billion.
Share price is not a bargain
Over the last year, Altria's share price has dropped by 9.8%, while the S&P 500 gained 17.3%. That's resulted in the stock's price-to-earnings (P/E) ratio getting cut by about half to 9. By contrast, the overall market sells at a 26 P/E multiple.
However, I don't think that translates to a bargain. Altria has sluggish earnings growth. In the most recent quarter, its earnings per share (EPS) -- adjusted for certain items, like litigation -- was $1.28, flat versus a year ago. Management expects adjusted EPS to grow by 1.5% to 3% for the full year.
While Altria has a high dividend yield and places a high priority on annual increases, with sluggish sales and earnings growth, I'd sell Altria shares. Dividend investors can find better alternatives that continue to increase sales and earnings to support higher payments for a long time.
