Altria Group (MO 1.01%) stock has long beaten the odds. Since the release of the Surgeon General's report on smoking 60 years ago, usage has declined and tobacco companies like Altria had to pay out hundreds of billions of dollars in legal settlements.
These challenges didn't prevent Altria's stock or dividend from rising. However, with tobacco consumption continuing to fall, the company hasn't found other revenue sources to compensate for this drop. That situation should put shareholders on notice, forcing them to consider whether they should stay in Altria stock amid this uncertainty.
Altria's declining business
Despite Altria's situation, the stock hasn't collapsed amid its struggles, and the factor preventing Altria from falling off a cliff is likely addiction. Once one becomes addicted to tobacco, it becomes exceedingly difficult to live without it. This factor appears to have enabled Altria to largely maintain current revenue levels through price increases.
Still, one has to wonder how long Altria can maintain this current strategy. Consumers who might have chosen tobacco in the past have increasingly turned to marijuana or vaping. Consequently, the total number of cigarettes shipped, which was almost 110 billion in 2018, fell to just over 76 billion in 2023.
Unfortunately for Altria investors, following customers into marijuana and vaping has proven challenging. In 2019, Altria made a $1.8 billion investment in Canadian cannabis company Cronos Group.
However, marijuana has proven volatile as a business, and U.S. legalization efforts haven't moved as quickly as some had hoped. Consequently, Cronos stock has lost seven-eighths of its value since Altria made its investment.
On the vaping front, Altria invested $13 billion in Juul. It abandoned that stake in 2023 following a $235 million settlement for 6,000 lawsuits related to alleged efforts to encourage teen vaping. Altria has since reinvested in the vaping business with a $2.7 billion acquisition of NJOY, but its size indicates it will not compensate for falling revenue.
Altria's financials
As mentioned before, Altria has so far avoided significant revenue declines. The company reported over $24 billion in revenue in 2023. That fell 2% in the last year and 4% from its 2018 revenue level.
Still, net earnings in 2023 came in at just over $8.1 billion, rising 41% in one year. This was enough to cover the $6.8 billion in dividend expenses for the year. The payout of $3.92 per share annually yields 9.3%, meaning the company's dividend yield is almost seven times the S&P 500 average of 1.4%.
Despite that massive dividend, the S&P 500's total return has dramatically outperformed Altria over the last five years. Due to the company's challenges, investors have avoided the stock, even though they can buy the tobacco stock at a price-to-earnings ratio (P/E) of 9. Such conditions arguably make the payout the only compelling reason to stay in Altria.
MO Total Return Level data by YCharts.
Should investors stay with Altria stock?
Despite the company's massive dividend yield, investors take on considerable risk with its stock. Admittedly, with Altria generating enough income to sustain the payout, a dividend cut isn't likely to happen in the near term.
However, declining tobacco usage and the uncertain state of Altria's investments in cannabis and vaping don't bode well for the company. That likely explains why the stock price has continued dropping and why total returns may continue to fall short of the S&P 500's returns.
Indeed, some investors may still choose to buy or hold Altria for the dividend. If that's the case, shareholders need to continue to monitor this company on a quarterly basis. If its cash flow significantly deteriorates, reducing or eliminating positions in Altria stock may become all the more critical.
