When a consumer staples company is sporting a nearly 10% dividend yield, the first thing income investors need to do is ask why. Consumer staples companies should generally be pretty boring businesses, and a yield that high is anything but boring.
Getting to the why in Altria's (MO -0.37%) case is pretty easy to do, but the answers suggest that most investors should tread very cautiously.
Altria's business isn't very diversified
When you look at Altria's financial statements, it breaks its business up into smokeable products, which includes both cigars and cigarettes, and oral tobacco products. But there's even more to the story when you look at revenue. Smokeable products account for roughly 89% of the company's revenue, and cigarettes account for just about 98% of that division's shipment volumes. Simply put, Altria's business is all about cigarettes.
This isn't necessarily a bad thing. Its main brand, Marlboro, boasted an industry-leading 42.3% market share in Q3 2023. Adding in smaller brands, the company's overall market share was 47.0%. It's undeniably a giant in the U.S. tobacco market. Given that cigarettes are highly regulated, Altria is protected to some degree from new competitors. And since nicotine is addictive, its customers have historically been fairly loyal.
In fact, this consumer staples company has been raising its prices for years to support its revenue and earnings. That has, in turn, supported the company's ability to pay a growing dividend. If you stop the discussion here, it would appear quite wise to buy Altria stock to capture its generous dividend yield.
There's more to know at Altria
But what about that all important cigarette business? If you look at the company's cigarette shipment volume, it was down 11.6% in Q3 2023, and it was down 10.5% through the first nine months of the year. That's a terrible trend, and it isn't new. The company's cigarette volumes have been in a steady decline as society moves away from smoking. The big takeaway here is that price increases are the only thing propping up the company's finances -- and its dividend.
Volume has fallen around 40% over the past decade or so. There will be a point when the company's price increases start to exacerbate the decline because it's charging too much for even its most loyal customers to bear. If you are a long-term dividend investor, these trends strongly suggest you should be wary of chasing Altria for the yield.
That said, there's another reason to worry. Altria has made a number of strategic missteps. For example, it split up its business by spinning off its foreign operations into Philip Morris International over 15 years ago. Now, that company is increasingly looking at the U.S. market for its non-cigarette tobacco products. In other words, Altria created a new competitor for itself because it failed to understand that diversifying away from cigarettes was going to be an important long-term strategic move.
On that score, Altria was an early investor in vape company JUUL and a cannabis company as well. Both ended up imploding and costing investors billions of dollars in write-offs. Altria is trying again with vaping after its $2.75 billion acquisition of NJOY. NJOY is further along in its business journey than JUUL was, so this foray into the vaping space may work out better, but so far, Altria's track record with bold strategic moves is pretty poor.
And the company must find a new growth business because its cash cow is dying. Ongoing strategic missteps aren't an option. This is another reason for caution, since every dollar wasted on failed initiatives potentially brings Altria one step closer to the point where it has to cut its dividend. Unless management can start racking up a few wins in the growing parts of the industry, the long-term outlook for the company is pretty dire.
Buying or holding Altria is a risky decision
As appealing as Altria's dividend may be, if you're hoping to live off that income for years or even decades in retirement, the risk you're taking on here is significant.
For those who just can't pass up on such a rich payout, be sure to track this business very closely. Altria is a company in decline, not a "set it and forget it" stock.
