Altria (MO -0.37%) knows exactly why investors buy its stock: the big, fat dividend. That's why the consumer staples company focuses so hard on raising the dividend every year.
But with the dividend yield at 9.6%, dividend investors should take a very cautious approach to the cigarette maker. That yield is more likely a warning sign of trouble than it is a huge long-term opportunity.
There was an opportunity, once
Over the past decade, Altria's dividend has roughly doubled. So, in hindsight, there was a huge income opportunity here for dividend-focused investors. In fact, the business story a decade ago was actually pretty attractive.
Image source: Getty Images.
Altria, which owns the most popular U.S. cigarette brand in Marlboro, effectively operated in a protected market thanks to increasing government regulation. Given that its customers were highly reliable buyers of the addictive products it sold, the risk of attrition, which even then was very real given the increasingly negative view of smoking, seemed relatively muted. And Altria retained huge pricing power to offset the hit from falling sales, anyway.
Fast-forward back to today, and the situation isn't the same at all. There are increasing alternatives to cigarettes, including vaping and even marijuana. And the attrition in the customer base has gotten to a point where investors need to be far more concerned.
Some numbers will help. In 2013, roughly a decade ago, Altria produced 134.9 billion cigarettes. In the third quarter of 2023, it produced 19.3 billion, which annualized would come out to roughly 77 billion cigarettes. Do just a little back-of-the-envelope math here, and you come up with a volume decline of roughly 40% in a decade.
If you saw a volume decline like that at any other consumer staples business, you would probably run for the hills, no matter how attractive the dividend yield happened to be.
Is Altria getting to the end of the line?
That said, Altria still makes a lot of cigarettes, and it still holds a dominant position in the U.S. market. So the plan to continue increasing prices might be enough to keep the dividend rising for a little longer. But at some point, rising prices are likely to exacerbate the volume decline and, thus, lead to an even faster business decline.
That point might have come in the third quarter of 2023, with the company changing its language around volume to include the impact of "the growth of illicit e-vapor products." The big takeaway is that once-loyal customers might finally be migrating in larger numbers toward cheaper alternatives.
So what has Altria been doing about this? It has tried investing in vape products and marijuana. But those early efforts failed spectacularly and resulted in billions of dollars worth of write-offs.
It is trying again with vaping, via the recent purchase of NJOY. That company is further along in its business development, so there may be a better chance of success in the vape space this time around. But even if NJOY works out as planned, the best that investors can really hope for is for NJOY to offset just some of the steep decline in the cigarette business.
After all, smoking products make up nearly 90% of Altria's top line. It will be hard, if not impossible, for a single new business to make up for the ongoing deterioration there.
All in, Altria looks like it will have an increasingly difficult time living up to its past dividend success going forward. That's not to suggest an imminent change in direction, but investors simply can't look at this company as a set-it-and-forget-it business. The time when that was true is long past.
Tread carefully with this high-yield stock
Altria is not the same company it was a decade ago. It isn't the same company it was five years ago, or three, or even one. That's because of the ongoing volume decline in its most important business.
Yes, the dividend yield is enticingly high. But the risk of the company hitting a materially negative business, and dividend, turning point is also getting higher. Most investors will probably be better off avoiding Altria.
