The resurgence of tobacco stocks has been an underdiscussed theme in 2025. While the world is worried about foreign conflicts, tariffs, and the Federal Reserve, stocks like Altria Group (MO 0.18%) have sneakily crushed the market. Shares are up close to 17% this year and are approaching $60, a level Altria hasn't hit since 2017. In times of uncertainty, investors flock to safe-haven stocks, such as tobacco, which typically perform consistently through all economic environments.
Altria Group still has a dividend yielding 6.85% right now, making it one of the highest dividend payers investors can buy today. But does that mean you should buy the stock? The answer may not be so simple. Here's why.
Moving into new products, with muted success
Altria is the owner of the Marlboro cigarette brand in the United States, focused solely on selling in the United States domestic market. As many readers are aware, cigarette usage in the United States has declined dramatically in recent decades, which has put stress on Altria's operations. These declines are only expected to continue, as young adult usage has quickly dropped in recent years, which will put further pressure on product volumes.
To diversify away from cigarettes, Altria has made major investments and acquisitions into other vice products. These include areas like cannabis, nicotine pouches, cigars, electronic vaping, and alcohol. So far, it has seen muted success in these new sectors and some major failures. Most notable was the company's huge $12.8 billion investment in Juul, which was eventually written down to zero. It currently has a sizable stake in Anheuser Busch, but that has been a long-term holding for the company.
Overall, if we look at Altria's business, it is still mainly driven by the smokeables segment, the majority of which is driven by cigarette consumption. Last quarter, 88% of Altria's net revenue came from smokables. Its new vaping and nicotine pouch initiatives are still a tiny part of the overall company.
Image source: Getty Images.
Long-term declines put the dividend at risk
Cigarette usage in the United States is declining rapidly and looks to be accelerating as consumers shift their nicotine consumption to tobacco-free categories like nicotine pouches. Last quarter, Marlboro volumes declined 13.3% year over year. Historically, cigarette usage declined at under 5% a year, making recent years a huge shift in the industry. This presents a large risk for Altria Group and its cash cows.
Management has been able to keep profits steady by rapidly increasing prices on packs of Marlboro cigarettes and trimming overhead costs, but this is not something that it can do indefinitely. The majority of Altria's $11.6 billion in annual operating earnings comes from cigarettes, which fuels its dividend growth. If these profits start declining and are not replaced by new nicotine use, Altria is at risk of halting its dividend growth or slashing its annual payment. This would be bad news for shareholders.
I am not talking about this happening next year but within the next decade. Eventually, there will be too few smokers in the United States for price hikes to counteract volume declines to maintain profitability. We are already seeing this impact on revenue. Altria's revenue peaked in 2021 and has been slowly declining ever since.
MO Revenue (TTM) data by YCharts
Growing debt and kicking the can down the road
Altria Group talks a big game about investing outside of cigarettes -- and has done so for over a decade (the Juul investment was in 2017). Yet, as we sit here today, close to 90% of its business still comes from combustible tobacco products.
Management has aggressively repurchased its own stock in recent years. Shares outstanding are down around 10% in the last five years. In a vacuum, this is not a bad thing, as a lower level of shares outstanding can allow a dividend payer like Altria to increase its dividend per share. In this case, it is being done so by taking on more debt and kicking the can down the road when it comes to diversifying its operations.
Altra Group has $26 billion in debt on its balance sheet, a number that has grown to fuel stock repurchases while the cigarette business continues to deteriorate. It hasn't caused Altria Group to cut its dividend yet and may not do so for a few years, but if the company follows this path, it will eventually lead to a bad outcome.
A highly leveraged balance sheet, huge volume declines, and zero success in diversification away from cigarettes is a bad combination for Altria Group. Investors would be smart not to buy this stock under $60 even with an attractive-looking dividend yield today.
