It is very easy to lose sight of the most important details when there's one detail that stands out in a huge way. For example, the income you could generate by adding ultra-high-yield Altria (MO 0.01%) to your portfolio is very alluring, given its incredibly high 9% dividend yield. But for long-term income investors trying to live off the cash their portfolios generate, buying Altria for its yield could end up being a bad decision. Here's why.
Altria is giving investors what they want
To put it simply, the biggest reason to like Altria today is its huge 9% dividend yield. The dividend has been increased for years, so management clearly understands that its shareholders want income. In fact, the entire business model is currently geared toward paying that dividend. That's a big problem if your holding period is measured in decades.
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While that yield may get you to look at the stock, you have to look past the yield before deciding to buy it. This all boils down to a look at Altria's business. Altria effectively owns the U.S. rights to Philip Morris cigarettes. Several years ago, Altria split off its foreign business as a stand-alone company known as Philip Morris International (PM +0.65%).
Cigarette volumes have been on a steady decline in the United States for a long time. To offset those declines, Altria has focused on increasing cigarette prices so it can continue to pay out a growing dividend. That has worked out well so far, which may be giving a false sense of security to income investors enamored of the 9% yield on offer here. From a business perspective, at some point, price increases are likely to exacerbate the volume decline issue.
And that time could be fast approaching when you consider how far volumes have dropped over the past five years. To put a number on that, in 2018 Altria produced 109.8 billion cigarettes. In 2023 that number had fallen to 76.3 billion, a roughly 30% change in the wrong direction. In fact, Altria warned for the first time in 2023 that illicit e-vapor products, which are generally cheaper than buying cigarettes, are an increasing competitive threat. Basically, product cost looks like it is a big problem for cigarettes.
Would you buy Coca-Cola (KO +1.11%) if its volumes had declined 30% in five years while it was sharply jacking up its drink prices? Probably not, because you would likely question whether or not management's aggressive pricing decisions were exacerbating the company's pain.
Altria has tried and failed and is trying again
Here's the thing: The volume decline isn't the only problem at Altria today. In fact, the company knows full well it has to do something or its business will eventually wither away. That's why it was an early investor in the vape space, putting money into industry pioneer Juul. It also jumped aboard the marijuana train, buying a massive stake in a grower as the industry started to take off.
NYSE: MO
Key Data Points
Both of those investments turned into billion-dollar black holes for investors, with Altria exiting them and taking massive write-downs. In other words, the company tried to find a new avenue for growth and failed. So not only do investors have to worry about the decline of the cigarette business, but also the company's execution in any other business it tries to enter.
On that front, the company recently bought NJOY, another maker of vape products. To be fair, NJOY is further along in its business development than Juul was. So there's a reason to believe that this vape investment will work out better than the last one. But even if it does turn out to be a relative success, beating the Juul investment is not a high bar. NJOY is also so small relative to the cigarette business (which makes up around 88% of Altria's top line) that it will, at best, offset only a portion of the ongoing decline over the near term.
Don't get distracted by the dividend yield
It is entirely possible that Altria will manage to find a replacement business for its declining cigarette operation and sustain its massive dividend. But at this point, the path to that outcome is cloudy at best. Given the ongoing volume declines in cigarettes and multiple failed attempts in developing new business ventures, investors need to tread very carefully when looking at Altria today. That 9% dividend yield comes with a huge amount of risk.
