I have two big problems with Altria (MO -0.37%). Even with those concerns, I was actually a little excited when the company announced that it was selling some of its holdings in Anheuser-Busch InBev (BUD 0.12%). And then Altria management blew a hole in what I thought should have been the next step (investing in the business) by announcing that it was going to buy back billions of dollars of its own stock.
Altria just proved again why it's not a stock that most investors should own. Here's why.
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Altria's yield is tasty, but what is management doing?
The one redeeming quality that Altria stock has is its dividend. The yield is a massive 9.1%, and the dividend has been increased annually for over 54 years. In fact, there's no particular reason to doubt that this consumer staples icon can keep paying the dividend over the near term. I totally understand why dividend investors would be interested in buying it.
In fact, the sale of Anheuser-Busch InBev shares and subsequent buyback announcement could even be seen as a positive. With the yield so high, buying back stock will likely strengthen the company's ability to support the dividend: Fewer shares, fewer dividends to pay.
When you step back a little further, it could be argued that buying back stock might be a better choice than letting management use that cash to invest in the business. After all, the company's investment in Juul and in the marijuana sector both ended up costing investors billions of dollars in write-offs. At least with the buybacks, you know exactly what you are getting.
But there's a small snag in the story that I just can't ignore.
Why did Altria invest in vapes and pot?
Altria missed the mark in a big way with its Juul and marijuana investments. The massive write-offs caused by these investments is reason enough to avoid the company in my book. But the real question is, why did it make these investments in the first place?
The answer is that its most important business, selling cigarettes, is in a long-term secular decline. And there's no sign that the bad news is slowing down.
To put some numbers on that, Altria produced 109.8 billion cigarettes in 2018. That was 5.8% below the figure produced in 2017. In 2023 the company produced 76.3 billion cigarettes, down 9.9% from 2022 levels.
But the year-over-year changes aren't the big story. The real problem is the 30% drop in production volume in just five years. That's abysmal and explains why management has been trying, with minimal success, to find a new line of business.
The only thing supporting the company's growth right now is regular price increases. But that can only go on for so long before the price starts to exacerbate the volume decline.
Altria is so desperate that it has gone back to the vaping space, recently buying NJOY. That business is further along in its development than Juul was when Altria invested in it. So maybe there are better prospects this time around.
Here's the thing: As much as I am worried about the company destroying value by investing in business ideas that don't work, I also recognize that it has no choice but to keep trying. Or, I guess, the company can buy back stock and let the business decline keep running its course. Neither path is one I like and, thus, I won't touch Altria stock with a 10-foot pole.
This is not what you want in a consumer staples company
Consumer staples companies are supposed to be boring and reliable. While Altria has been a reliable dividend stock, the business itself is in decline and, so far, nothing management has done has stopped the bleeding.
Buying back its stock, in my opinion, isn't a long-term solution to the very serious problems Altria faces. In fact, it is just one more reason to avoid this company despite its massive dividend yield.
