Altria (MO -0.37%), the largest tobacco company in America, was once considered a stable long-term investment. It owns Marlboro, the country's most popular cigarette brand, and it's reliably raised its dividends every year since it spun off its international business as Philip Morris International (NYSE: PM) in 2008.
But over the past five years, Altria's stock declined 15% as the S&P 500 rallied 81%. Even after reinvesting its dividends, Altria only generated a total return of 25%. Let's see why Altria's stock fizzled out -- and if it's too late to turn bullish again.
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A brief history of Altria and Philip Morris International
When Altria spun off Philip Morris International, it faced three major challenges: U.S. smoking rates had declined sharply since the 1960s, it was being sued by government regulators, and rising excise taxes were driving up its prices.
That's why Altria spun off PMI. As a stand-alone company, PMI expanded into higher-growth overseas markets with more lenient government regulations and lower excise taxes. Altria stayed in the U.S. to handle the litigation and squeeze more profits from its declining cigarette shipments with price hikes, cost-cutting measures, and big buybacks.
That separation made PMI a more compelling investment than Altria. Over the past five years, PMI's stock rallied 23% and delivered a total return of 63%.
What were Altria's biggest challenges?
From 2018 to 2023, Altria's annual cigarette shipments declined from 109.8 billion sticks to 76.3 billion sticks. Marlboro's retail market share also slipped from 43.1% in 2018 to 42.1% in 2023 as the entire cigarette market shrank.
Between 2018 and 2023, Altria's annual revenue (net of excise taxes) grew at a compound annual growth rate (CAGR) of less than 1%. It managed to barely grow its revenue by raising its cigarette prices to offset its declining shipments, and by selling more non-cigarette products like cigars, snus, nicotine pouches, and e-cigarettes. However, Altria's adjusted earnings per share (EPS) still grew at a CAGR of 4% as it cut costs, laid off workers, and bought back 6% of its shares.
Why aren't value-seeking investors swooping in?
Altria currently pays a massive forward dividend yield of 9.8% and trades at just eight times forward earnings. However, it might deserve that steep discount because it faces existential challenges. At some point in the near future, Altria could run out of room to hike its prices and cut costs to offset its declining shipments and market share losses.
Altria tried to avoid that grim fate by acquiring a $12.8 billion stake in the domestic e-cigarette maker Juul in 2018, but that investment withered after the U.S. Food and Drug Administration (FDA) banned all of Juul's products in 2022. Altria also took a 45% stake in Cronos Group (NASDAQ: CRON) for $1.8 billion in 2018, but the Canadian cannabis company has struggled and lost more than 80% of its market value since that initial investment.
Altria even briefly partnered with PMI to sell the latter's iQOS heated tobacco products in the U.S., but PMI bought out Altria's stake in the partnership last April. All of those clumsy efforts indicated that Altria was desperate to reduce its long-term dependence on the cigarettes that still account for the lion's share of its total revenue.
Last June, Altria acquired the e-cigarette maker NJOY -- which already had its products approved by the FDA -- for $2.75 billion. That investment might finally give it a meaningful foothold in the e-cigarette market, but it expects the acquisition to throttle its adjusted EPS growth in 2024 and 2025 before finally becoming accretive to its earnings in 2026.
Is it too late to buy Altria's stock?
Altria expects its adjusted EPS to grow 1%-4% in fiscal 2024. But once again, that growth will likely be driven by price hikes, cost-cutting measures, and its new $1 billion buyback plan instead of any meaningful revenue growth. Analysts expect its total revenue to rise by less than 1% for the year as its adjusted EPS grows 2%.
Altria's anemic growth and long-term challenges suggest it's too late to consider it a cheap income play. Therefore, investors should avoid it and either stick with higher-growth tobacco stocks like PMI or buy other blue-chip dividend stocks instead.
