Altria (MO -0.42%) is a consumer staples giant with a growing dividend and a huge 7.4% dividend yield. That looks like a big opportunity for income investors, given that the S&P 500 is only yielding 1.2% and the average consumer staples stock just 2.5%.
But before you rush in to buy Altria, you need to know a few things.
Altria looks good from afar
A 7.5% dividend yield is large, and it wouldn't be shocking for an income-focused investor to think it could set them up for life. That's particularly true since the dividend has been steadily increasing, growing at around 4% a year over the past five years. That's a touch higher than the average growth of inflation over time (which is closer to 3%, despite the recent uptick). So, from a big-picture perspective, Altria appears to offer a large up-front income stream that also grows its buying power over time.
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Then there is the company itself, which operates within the consumer staples sector. Consumer staples stocks sell things that get purchased frequently, and demand for these products isn't usually impacted by economic swings. The sector is generally considered a good place for conservative investors to fish for investment ideas because of the overall consistent business performance of the industry's constituents.
As for Altria's business, it happens to own the largest high-end brand in the market on which it is focused. That brand is Marlboro, which has a nearly 42% market share in North America, which is the company's biggest market. However, this is where some negatives start to creep in, since Marlboro is a brand of cigarettes.
There are big problems to consider with Altria
As a tobacco company, Altria is facing some unique threats that other consumer staples companies, such as food makers and consumer products firms, aren't. And cigarettes are, specifically, in the crosshairs of regulators because of both their addictive nature and the health dangers they pose to those who smoke. Smokeable products make up around 88% of Altria's revenue, and cigarettes account for roughly 98% of volume in the company's smokeable products division.
To make matters worse, Marlboro, while an important and dominant brand, accounts for roughly 90% of the cigarettes that Altria sells. This means Altria is highly reliant on just one product and brand. If anything were to go wrong with that product and brand, it would not be a good thing.
And things aren't going well. Cigarette volumes fell 10.6% year over year through the first nine months of 2024. Volumes fell 9.9% in 2023. And the decline was 9.7% in 2022.
The company has been offsetting this ongoing decline in volume by raising prices. That has worked so far, and could continue working for a while longer, but at some point, the price hikes will probably just make the declines worse. And it has not had much success in finding a replacement product, with costly write-offs associated with investments in vaping and marijuana. A second attempt in the vaping sector, with the purchase of NJOY, appears to be going well, but the business is tiny relative to its cigarette operations.
Altria's timeline looks limited
Altria's business appears to be heading toward a cliff. Right now it is coasting along despite the negative volume trends thanks to price increases. At some point, the cigarette business is likely to hit an inflection point and start to spiral downward, noting that these volume declines highlighted are getting worse. Given that trend, it seems unlikely that Altria is an investment that can be bought with the expectation of creating an income stream that will last the rest of your life.
It is entirely possible that management finds a way out of this situation, perhaps with NJOY, but right now it isn't clear this will happen, and the clock is ticking loudly. Altria is a high-risk income stock that only the most aggressive, active investors should probably be considering.
