Altria’s biggest business is selling cigarettes and cigarettes are going out of style, which most people realize. But did you know this fact?
When most investors look at Altria (MO -0.08%) what they see is a huge 8% dividend yield backed by a dividend that has been increased for years. That is the type of story that most dividend investors will find attractive. But there’s a big risk here because the company’s core business is in long-term decline. That risk has to be understood, but there’s another subtle twist that you may have overlooked.
Altria’s business is slipping away
It shouldn’t come as any shock to Altria shareholders that the company’s most important business is making cigarettes. In the first half of 2024, the company generated roughly $11.8 billion in revenue. Its smokeable products division’s revenues were about $10.4 billion, or 88% of the company’s overall top line. Clearly, smokeable products is the driving force at Altria.
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To be fair, the company sells a variety of smokeable products, including cigars. But when you look at volume, cigarettes account for just over 97% of the division’s volume. So cigarettes are the big story at Altria. But, as noted, most investors know that fact.
The important story here isn’t the largest business. It is the decline that’s taking place in the largest business. Through the first six months of 2024, cigarette volumes dropped 11.5%. That’s terrible and would likely be seen as shocking at any other consumer staples company — investors would run for the hills. Only that drop is just par for the course.
In 2023, cigarette volumes declined 9.9%. In 2022, volumes fell 9.7%. In 2021, the drop was 7.5%. You get the idea, this is a dying business.
One “little” problem that can’t be overlooked
How has a company with a business that’s in decline managed to maintain its dividend, let alone grow it? The answer is that, because of the nature of cigarettes, smokers tend to be very loyal. So Altria has been jacking up prices on a regular basis to offset the volume declines. That’s worked out well so far, but you can only milk a cash cow so hard before it runs dry. That’s a bigger risk for Altria than many may realize.
Of the cigarettes Altria sells, only about 4% or so fall into the discount category. That means Altria’s business is basically reliant on premium smokes. In the premium category, “other premium” brands make up about 4.5% of total volume. The remaining 91% of the company’s cigarette volume is all attributable to one brand, Marlboro.
Marlboro is a giant in the U.S. cigarette industry with a huge 42% market share. This could be viewed as a strength. But step back for a second and think about the big picture. Altria is basically a one-trick pony in a dying rodeo. And its pony is one of the most expensive around at a time when price competition from smoking alternatives is heating up. Altria itself notes that “the growth of illicit e-vapor products” is a big problem, which is largely because they are less costly.
Fixing the problem won’t be easy
There’s only so much Altria can do about its reliance on Marlboro as the cigarette business declines. In fact, being the biggest player in the industry is probably preferable to having a second rung brand. What it is doing is trying to broaden its reach beyond cigarettes. This is the right thing to do, but given the size of the company’s cigarette business it isn’t going to be easy to find a replacement. After a couple of failed attempts, including an investment in Juul and in a marijuana company, Altria is currently focused on growing its recent NJOY vape acquisition.
It is going well, with NJOY experiences rapid growth as it has been slotted into Altria’s impressive distribution system. To put a number on that, in the second quarter of 2024 NJOY’s shipment volume increased 14.7% from the first quarter and NJOY device shipments increased 80%. The problem is that NJOY is tiny, falling into Altria’s “all other products” revenue category which made up just $22 million in revenue in the first half of 2024 at a company with nearly $11.8 billion in revenue. So NJOY is barely even a rounding error. Marlboro is the key to Altria’s future and will likely remain the key for years to come.
If Altria hits a tipping point, it could get bad fast
A consumer staples company can only raise prices just so far before there’s a backlash from consumers. The easy switch with cigarettes is to buy cheaper smokes, which Altria really doesn’t sell. Then there’s alternatives to worry about, such as the company’s highlight of vaping. Although Marlboro has been holding its own, in 2021 its market share was 43.1%. That’s 1.1 percentage points above its current level.
If Marlboro falters, Altria could fall. This is a “little” fact that many investors probably aren’t considering as they look at the huge dividend yield. Basically, there’s greater concentration risk here than many people realize.