Altria (MO 1.11%) has a huge 9.4% dividend yield. For a consumer staples company, that is shockingly high. However the dividend has been increased annually for years, so some dividend investors might see this as an income opportunity. It probably isn't, and a quick look at the company's most important business will help explain why.
Altria is the giant in a shrinking industry
Although the Altria name is a bit nondescript, the company's main Marlboro brand is very well known. It is the dominant cigarette in North America, with a huge 42.3% market share. That's impressive, but there's a bigger-picture problem here. Cigarette smoking is falling out of favor.
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To put some numbers on that, in the third quarter of 2023 Altria produced 17.4 billion Marlboro cigarettes. It produced around 19.3 billion cigarettes across all of its brands. Roughly five years earlier, in the third quarter of 2018, it produced 25.6 billion Marlboro cigarettes and a total of nearly 29.7 billion cigarettes across all of its brands.
Using some back-of-the-envelope math, that means that Marlboro's production fell nearly 33% in five years. Overall, cigarette production declined 35%. If you extrapolate that trend into the future, given the ongoing nature of the decline year after year over that span, you could estimate that Altria's overall cigarette volume will fall to somewhere between 12.5 billion to 13 billion or so in five years' time.
That's a terrible business trajectory. So far, the company has been using price increases to offset the volume hit. But that can only go on so long before the company bleeds its cash cow dry.
Cigarettes are just too big a business
Altria knows this is a problem. That's why it invested in vaping company JUUL and a marijuana company several years ago. Only both of those investments have flamed out, leaving behind billions of dollars in write-offs. That hasn't stopped management, because it needs to replace the cigarette business, and it is trying again with the acquisition of vaping company NJOY.
NYSE: MO
Key Data Points
To be fair, this consumer staples giant is doing the right thing in trying to replace cigarettes. But even if NJOY is a success, it may not be enough to save the company's dividend. The reason is fairly simple math. The company's smokeable products business, which is largely cigarettes, accounts for around 90% of the top line. That's just too big a business to easily replace.
The best investors can hope for from NJOY is that the business helps offset some of the cigarette decline. Or, put another way, NJOY might help slow the bleeding down but it probably won't be enough to save the cow. If you are looking to Altria for a reliable dividend, you should strongly consider the downside risk here.
Even a best case is a bad case for Altria
Altria knows that the main attraction of its stock is the dividend, which is why it has worked so hard to keep the dividend growing despite the massive headwinds the company is facing at the business level. At some point, however, the company is likely to have to admit that its largest business just isn't sustainable enough to support the outsized dividend it pays. And even a successful replacement business probably won't be enough, given the importance of cigarettes to the company's top and bottom lines. In five years, Altria will likely have a smaller core business and, probably, a smaller dividend, too.
