Altria (MO -0.37%) is often considered a stable long-term investment for dividend investors. It's the largest tobacco company in America, its stock trades at just 9 times forward earnings, and it pays a hefty forward dividend yield of 8.8%.
Yet, Altria has generated dismal returns for those patient investors. Over the past five years, its stock has declined 22% and generated a total return of just 15% after including its reinvested dividends. During the same period, the S&P 500 advanced 83% and produced a total return of 99%.
Past performance isn't a dependable indicator of future results, but I believe it's still smarter to sell Altria's stock than to buy it for four simple reasons.
Image source: Getty Images.
1. Its core business is in terminal decline
Altria, which spun off its international division as Philip Morris International in 2008, generates most of its sales from the U.S. market. Most of that revenue still comes from Marlboro and its other cigarette brands.
That business model is wobbly because U.S. smoking rates have steadily declined over the past six decades. That's why Altria's annual cigarette shipments fell from 109.8 billion sticks in 2018 to 76.3 billion sticks in 2023.
At the same time, Marlboro's share of the U.S. retail cigarette market dropped from 43.1% in 2018 to 42.1% in 2023 as competitors like British American Tobacco eroded its shrinking customer base. Altria's entire retail share of the cigarette market also fell from 50.1% in 2018 to 46.9% in 2023.
2. It's running out of ways to boost its EPS
Altria's total revenue (excluding excise taxes) still grew from $19.6 billion in 2018 to $20.5 billion in 2023 as it raised its prices, cut costs, divested its non-core businesses, and bought back about 6% of its shares. As a result, its adjusted earnings per share (EPS) increased from $3.99 in 2018 to $4.95 in 2023.
However, many states are still hiking their excise taxes on tobacco products. A pack of cigarettes now costs $10-$12 in over 10 states, according to World Population Review, so Altria could be running out of room to raise its prices.
3. Its future road map is murky
Altria generated 87% of its revenue from its smokable products (including cigarettes and cigars) in 2023. The remaining 13% came from smoke-free products like snus, heated tobacco, e-vapor, and e-cigarette products.
The company's smoke-free revenue rose less than 4% in 2023 as its shipments stayed nearly flat. But over the long term, the company aims to nearly double the segment's sales from $2.7 billion in 2023 to $5 billion and curb its dependence on smokable products. That's an ambitious plan, but Altria has repeatedly fumbled its attempts to expand its smoke-free business.
Its $12.8 billion investment in e-cigarette maker Juul in 2018 withered after the U.S. Food and Drug Administration (FDA) abruptly banned all of its products in 2022. Its $1.8 billion investment in Canadian cannabis maker Cronos Group in 2018 also shriveled amid regulatory challenges. Altria also partnered with Philip Morris International to sell its Iqos heated tobacco products in the U.S., but PMI subsequently bought out Altria's stake in that partnership in late 2022.
To get back on track, Altria acquired e-cigarette leader NJOY -- which already had its products approved by the FDA -- for $2.75 billion last June. That move should strengthen its smoke-free segment, but it also expects the acquisition to reduce its adjusted EPS growth throughout 2024 and 2025.
4. It could freeze or cut its dividend
For 2024, analysts expect Altria's revenue to stay nearly flat as its adjusted EPS grows 2%. Its business isn't headed off a cliff yet, but it could stumble as it tries to expand its smoke-free portfolio to offset its declining cigarette revenue.
If Altria fails to maintain that delicate balancing act, its free cash flow (FCF) growth -- which was previously propped up by cost-cutting strategies and big divestments -- could easily sputter out. It already spent 75% of its FCF on its dividends over the past 12 months, so it could be forced to freeze or even cut its dividend if its earnings stop growing.
Stick with other blue-chip dividend stocks
Altria probably won't freeze or cut its dividend anytime soon, but its near-9% yield should be a bright red flag for most income investors. Its underlying business is struggling, and any future declines in its stock price could easily wipe out its dividend gains. So for now, I believe investors should avoid Altria and stick with more resilient blue-chip dividend stocks that pay lower yields but have more sustainable business models.
