Altria(NYSE: MO) is basically a one-trick pony when it comes to what it sells. Combustible tobacco products -- largely cigarettes -- make up roughly 88% of its top line. This had long been viewed as a problem by investors, but recently, some small positives have left investors willing to overlook the very real problems Altria continues to face.
Altria's biggest problem hasn't changed
Cigarette sales volumes are in a secular decline: That's the central truth that investors must recognize when they examine Altria as a business. To put some specifics on that, the number of cigarettes the company sold in 2023 fell by a huge 9.9%. In 2022, the number of smokes sold dropped by 9.7%. And in 2021, the decline was 7.5%. That was just three years, and the downtrend has been going on for much longer. To bring it up to date, meanwhile, in the first half of 2024, cigarette volumes dropped 11.5% year over year.
Image source: Getty Images.
For the company and its shareholders, this is not a positive thing.
To be fair, so far, the company has been able to raise its prices per pack by more than enough to offset the impacts of those volume declines on its profits. But Altria can only keep raising the prices that smokers pay for so long before that strategy reaches its limits. Even taking into consideration the addictive nature of nicotine, it is normal for consumer staples companies to lose customers as they raise prices. At some point, if the price increases go too far, they reach a tipping point and volume declines start to hurt both the top and bottom lines.
Perhaps Altria still has more room to raise prices, but, logically, it can't get to the point where it is charging hundreds of dollars for a pack. There must be an upper limit.
What's interesting is that some investors are so enamored of Altria's high dividend yield of about 8% that they are willing to overlook the fundamental problems the company faces. And Wall Street appears happy to see tiny positives as huge opportunities. For example, Altria recently bought vape maker NJOY, and it's having strong initial success as it plugs the product into its massive distribution system. But the revenue from NJOY is so small that the unit still lives in an "other" revenue category that made up just $22 million of the company's $11.7 billion in first-half revenue. That's basically inconsequential.
A quick stock chart comparison
The chart below compares Altria's stock price over the past year to that of Hormel(NYSE: HRL), a packaged food maker. Notice that Altria's stock has been heading higher while Hormel's stock has not.
So what's going on? Hormel's volume was up just 0.5% in 2021. Volume then fell by 8.2% in 2022. It dropped another 4.2% in 2023. And it was lower by 2.3% through the first nine months of fiscal 2024. Investors are unhappy with that trend. In fairness, Hormel hasn't had as much success in passing price increases along to consumers as Altria has had. However, its stock price action has been what you would expect based on its sales volume declines. And those volume trends are directionally similar to what is happening at Altria, though not nearly as bad.
And yet Altria's volume issues don't seem to bother Wall Street today despite the very real fact that they reflect an existential risk to the company's largest business. In fact, the trends could be getting worse. In the second quarter, cigarette volumes dropped by a huge 13% year over year.
A high-risk stock despite its high yield
Wall Street often grabs hold of a story and runs with it, but sometimes the story isn't the one to which investors should be paying attention. It's a paradox of investing: Emotions can sway investors to the point where they ignore the most important facts facing a company.
Before you invest in Altria and its clearly shrinking cigarette business, ask yourself if the positives offered up by the still-tiny NJOY are enough to offset the fundamental headwinds plaguing its most financially important division. You may think NJOY will be a transformative investment, but until there's a lot more evidence to support that premise, Altria will remain a risky dividend stock that only the most aggressive investors should consider.
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Reuben Gregg Brewer has positions in Hormel Foods. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
