In a previous article, I discussed four reasons dividend investors should buy Altria (NYSE:MO) -- its high payout ratio, return on equity, free cash flow, and disciplined approach to protecting its bottom line and dividends. In this article, we'll focus on three other factors -- cigarette prices, non-cigarette products, and Altria's potential future as a dividend aristocrat.

Altria's flagship Marlboro brand. Source: Wikimedia Commons.

Altria can keep raising prices
Last year, Altria's cigarette shipment volumes declined 4.1% year-over-year to 129.3 billion units. That's a 24% decrease from 169.4 billion units in fiscal 2008. Yet over those six years, Altria's annual revenue rose 26%.

Altria offset declining volumes with three core strategies -- diversifying into non-cigarette products, cutting jobs, and raising cigarette prices. However, investors might wonder how much more Altria can hike prices before adversely impacting demand. To better understand the situation, let's compare U.S. cigarette prices and smoking rates to some other major markets:


Price per pack of 20 cigarettes, including taxes

Smokers as a % of population

A pack of cigarettes as % of average* monthly income

























Sources: Tobacco Atlas, government and industry *UNECE and ILO statistics.

It certainly seems that Russia's low-priced cigarettes contribute to its 40% smoking rate, but the U.S. smoking rate is actually comparable to Canada, the U.K., and Australia -- which suggests that cigarette pricing has little impact on national smoking rates. The average price of cigarettes across the U.S. also accounts for a lower percentage of monthly income than the five other countries. Therefore, prices topping out isn't a near-term concern, although higher federal and state excise taxes (which rose 120 times between 2000 to 2013) could eventually throttle Altria's ability to raise its wholesale prices.

Altria's future depends on non-cigarette products
Altria might have room to keep raising prices, but it still needs new products to generate fresh revenue. Altria has several ways to grow beyond cigarettes -- cigars, snuff, pipe tobacco, wine, e-cigarettes, and a 27% stake in SABMiller. Cigars and pipe tobacco are classified with cigarettes in Altria's "smokeable" products category, snuff and e-cigarettes are reported under its "smokeless" category, and Ste. Michelle Estates wine is kept in its own segment.

The problem is that smokeless revenue is rising very slowly. Between 2009 (the first year smokeless products were introduced) and 2010, Altria's smokeless revenue rose 13.6%. But between 2010 and 2013, year-over-year growth slowed to 4.8% in 2011, 3.9% in 2012, and 5.1% in 2013. As a percentage of overall revenue, the smokeless segment only accounted for 5.8% of its top line in 2009 and 7.3% in 2013. During those four years, annual smokeable revenue -- which accounts for 89% of Altria's revenue -- only grew 4.5%.

That's why Altria expanded into e-cigarettes. Altria's Nu Mark subsidiary, which makes MarkTen e-cigarettes, acquired premium e-cig company Green Smoke earlier this year to grow its "vaping" presence. The current e-cigs industry is dominated by Blu eCigs, which Lorillard (UNKNOWN:LO.DL) sold to Imperial Tobacco Group in July. Altria's domestic market share is unclear, since it hasn't expanded the MarkTen brand nationwide yet, but the company claims that it ranks among the "top three" e-cig brands in the western half of the country. Yet the overall future of e-cigs remains unclear, since increased regulation, public bans, and excise taxes could derail the fledgling market.

If Altria's e-cigs fail to capture meaningful market share and overall demand wanes, Altria's smokeless revenue won't grow fast enough to offset slower smokeable growth. That means Altria would have to rely on more aggressive price hikes and job cuts to protect its bottom line and dividend.

A future aristocrat
A "dividend aristocrat" is a company that raises dividends for 25 consecutive years. Altria (then known as Philip Morris Companies) paid a dividend since 1987, but it isn't considered a dividend aristocrat due to the spin-offs of Kraft Foods (UNKNOWN:KRFT.DL) and Philip Morris International (NYSE:PM), which caused its dividend to temporarily dip in 2007 and 2008. But since then, Altria's quarterly dividend has consistently climbed every year.

MO Dividends Paid (TTM) Chart

MO Dividends Paid (TTM) data by YCharts

Altria's dividend payments over the past twelve months amount to 88.5% of earnings and 86.4% of its FCF. Investors should keep an eye on Altria's ability to maintain those ratios year after year to gauge its commitment to becoming a future dividend aristocrat.

The road ahead
Looking ahead, Altria remains one of my favorite income generating stocks, although it's certainly not a stock to simply "buy and forget." Investors should see if Altria can keep using price increases to offset decreased shipment volumes, and if its smokeless products and wine can grow into a more meaningful part of its top line.