Altria Stock: Buy, Sell, or Hold?

There was a time like that altria group (M.O. -0.12%) — when it was still called Philip Morris — was a corporate powerhouse. Tobacco giants have faced predictable problems related to the health risks of smoking since the ’90s, yet they’ve still managed to grow sales and profits from then to now.

But the past few years have been decidedly different for Altria and its peers. Thanks to the ongoing anti-smoking campaign, the entire tobacco industry is at a tipping point. Altria’s 2023 revenue was lower than the previous year’s level for the second year in a row, and the total number of cigarettes it sold decreased. This year’s results are not expected to improve significantly either. It’s not that hard for investors to find companies with better growth prospects.

But it would still take a narrowly focused lawsuit to get into Altria stock at this point.

Tobacco doesn’t have much of a long-term future.

Seasoned investors probably know the history here. Until 2003, Altria was known for its flagship cigarette brand, Philip Morris, but it was more than just a brand. It also owns the rights to manufacture and sell Marlboro cigarettes in the United States, as well as several other lesser-known brands. Beyond cigarettes, Altria is the name behind oral tobacco products from Skoal and Copenhagen, as well as e-cigarette brands like NJOY and heated tobacco products from Horizon. It also owns minority stakes in beer and cannabis companies.

That’s a good mix. If U.S. consumers are looking to indulge in nicotine-based vices, Altria is ready to serve them.

But the reality is that all products in these categories are living on borrowed time.

For example, consider data from a recent Gallup poll on smoking. As of 2023, 12% of U.S. adults smoke cigarettes, continuing a long-term downward trend from more than 40% in the 1970s. The number of people who have acquired this habit is decreasing. Gallup reports that in the early 2000s, about one-third of young people smoked at least some of the time. Today, that number has been reduced to just 10%.

If you don’t start smoking when you’re young, you’re less likely to start smoking later in life.

To be fair, vaping is becoming more popular and explains at least some of the decline in tobacco use. However, consumers of all ages do not view e-cigarettes as a significantly safer alternative. This is the main reason why the CDC reports that the rate of e-cigarette use among U.S. teens in 2023 will increase from 14.1% to 10%.

Connect the dots. Anti-smoking advocates have won the war, and it is unlikely that Altria or the other tobacco giants will be able to turn the tide.

That doesn’t mean Altria doesn’t still have something to offer investors in the near term.

There is no immediate danger

Don’t misread the message. A headwind is blowing. It blows incredibly slowly. Significant population growth is now offsetting a significant portion of the decline in smoking prevalence in the country. Indeed, what about Gallup’s calculation that 12% of US adults will smoke in 2023? This is actually up from 11% in 2022.

Meanwhile, although smoking among teenagers has decreased, 18- to 24-year-olds remain a significant group of e-cigarette users. They are also more likely to smoke e-cigarettes as well as smoke traditional cigarettes. Therefore, this age group remains a major customer for tobacco companies like Altria, no matter how they choose to consume nicotine. The number may not be that large. However, this group is the least likely to try to quit either habit.

Importantly, Altria can expect measurable demand for its products, tobacco-based or not, to continue well into the future.

This demand drives the business, which, all things considered, is surprisingly profitable. Half of last year’s revenue came from operating income, and more than 8% of the company’s sales came from adjusted net income, even as costs continue to rise in a challenging environment. And it was a very typical year, mirroring the 2022 numbers.

Of course, this reliable income stream supports Altria’s equally reliable quarterly dividend. Not only has the dividend been paid like clockwork for decades, but it has increased every year for the past 54 years (after adjusting for spinoffs and splits).

And this is where the argument for owning Altria stock begins to take shape. There may be no meaningful growth left. However, there is still a large amount of dividend income left to be distributed until the company eventually runs out of enough paying customers to continue paying dividends as it currently does. The dividend yield is an impressive 9.6%, but new entrants will likely enter the market.

Altria is now a great income stock, even if it won’t last forever

Just how long can Altria continue to pay out this big dividend? That’s it – no one knows for sure. It will probably take at least a few more years. It may take several more decades. Just as it is impossible to know what the legal landscape of the industry will look like in the future, it is impossible to know how the world will view smoking and vaping in the future. Share buybacks completed during that time will support the dividend per share. Income-oriented investors buying into this high dividend will just want to stay on top of the company’s business trends. You’ll understand if you know.

Try not to wait too long before exiting. This income-oriented stock does not function like a bond, with principal recovered when the bond matures and stops paying interest. If Altria is unable to maintain its current dividend payments, the stock will leave little value for investors.

Of course, if you need growth and don’t care about income right now, there’s little point in owning this late-stage tobacco giant.