Three compelling reasons to invest in Altria's shares without delaying your decision.
Three compelling reasons to invest in Altria's shares without delaying your decision.
Altria (MO -0.40%) is a stock that often sparks intense feelings among investors. There's not much middle ground; individuals tend to either admire or criticize it vehemently. The reasons that attract or deter investors come down to a few fundamental factors. Let's delve into three reasons that could lead investors to appreciate Altria, as well as the same reasons that might dissuade them from buying the stock.
1. Altria boasts an impressive 7.3% dividend yield
Dividend-focused investors are particularly likely to take notice of Altria given its substantial 7.3% dividend yield. The typical consumer staples company is only capable of offering a yield of 2.6%, as indicated by the Consumer Staples Select Sector SPDR ETF (NYSEMKT: XLP) with its 2.6% yield. Even the mighty S&P 500 index (SNPINDEX: ^GSPC) only rewards investors with a paltry 1.2%. Moreover, Altria has demonstrated consistency in raising its dividend over the years. From this perspective, Altria holds numerous allures for dividend-oriented investors.
But stocks offering significantly higher than average dividend yields do not come without warning signs. In Altria's case, the problem lies in a persistent shrinkage in its primary product, cigarettes. This downward trend has been ongoing for quite some time and shows no signs of reversing. In fact, the declines might even be accelerating. Altria's cigarette volume fell 9.7% in 2022, 9.9% in 2023, and 10.6% through the first three quarters of 2024.
While Altria's strong yield may seem appealing, investors must recognize the inherent risks that come with it. The risk in this situation is that Altria's cornerstone business could find itself stuck in a state of long-term decline.
2. Altria dominates the North American cigarette market by controlling Marlboro
Despite its challenges, Altria's position within the cigarette industry is noteworthy. For starters, it only operates in North America. However, it holds the most significant cigarette brand in that market, Marlboro. Marlboro's market share in North America stands at an impressive 41.7%, while its lead in the premium segment is even more pronounced at 59.3%. It is indisputable that Altria commands substantial market power and counts those advantages among its assets. This translates into greater pricing flexibility, as Altria has been able to use price increases to offset the volume declines mentioned earlier.
However, Altria's singular focus on the North American market poses risks of its own. It can be said that Altria is the very definition of a "one-trick pony." The company was spun off from Philip Morris International, which operates similar brands worldwide but outside of North America. With only a single market in operation, Altria faces reduced diversification compared to its former self. The narrow focus is further exacerbated by the fact that its core business revolves around a single product: Marlboro. If challenges arise within this market, Altria's options for tackling them are limited.
Things become even more challenging when considering that Philip Morris International is gradually gaining ground in the North American market with various tobacco products, behavior that might ultimately result in Altria facing a formidable, new competitor.
3. Altria may have finally discovered a growth driver with NJOY
If one looks at Altria through optimistic eyes, its recent acquisition of e-cigarette manufacturer NJOY is a significant boon. In the third quarter of 2024, NJOY's volume of consumables increased 15.6% compared to the same period in 2023. The company also saw a doubling in the shipment of NJOY devices. NJOY's market share also expanded by 2.8 percent versus the prior year, reaching 6.2%. Given these positive developments, many believe that Altria has finally found a product that can counterbalance its cigarette sales declines.
However, some investors might approach this development with a more skeptical perspective. First, NJOY represents the third attempt by Altria to uncover a growing product. Previous endeavors, such as investments in Juul and a marijuana company, did not pan out due to a lack of success and ultimately resulted in significant financial write-offs. While NJOY is currently enjoying high growth, it remains to be seen if this momentum will continue over the long term.
Additionally, NJOY remains a relatively small business. It generated only $19 million in revenue in the third quarter of 2024, although its rapid growth is noteworthy. It is reasonable to suppose that once NJOY's products become integrated into Altria's distribution system, the growth rates may eventually slow down. For now, the large gains have primarily resulted from modest beginnings and may not continue for long.
The acquisition of NJOY certainly represents a step in the right direction for a company that has been plagued by multiple setbacks. But it remains to be seen if it will ultimately prove to be the elusive strategy that enables Altria to stabilize its business.
In conclusion, Altria can be an appealing investment option for those drawn to its high dividend yield and strong market position. However, investors must be aware that these strengths also present inherent risks and challenges. Altria boasts a powerful dividend yield, but the sustainability of this return may be questioned given its waning cigarette sales. Its dominance in the North American cigarette market provides a degree of pricing power, but that advantage is counterbalanced by the perceived lack of diversification and over-reliance on a single product. Lastly, the recent acquisition of NJOY holds tremendous potential for growth, but the long-term viability of this growth engine is still in question. Investors must approach Altria with caution, recognizing both its strengths and weaknesses.
Altria isn't necessarily a negative entity, and it has plenty of favorable aspects. However, these advantages come with substantial risks. This isn't exactly a low-maintenance dividend stock that you can leave untouched. Even if the high yield is alluring for conservative income investors, they might want to steer clear due to the inherent risks. If you choose to invest in Altria, it's crucial to be aware of the risks and monitor the company's progress closely so that the potential negatives don't escalate.
- For investors seeking opportunities in the finance and investing space, Altria's impressive 7.3% dividend yield and strong market position make it an attractive option, especially when compared to the typical consumer staples company and the S&P 500 index.
- While Altria's strong dividend yield and control over the popular Marlboro brand in the North American market may appeal to investors looking to finance their investments, the company's reliance on the cigarette market and lack of diversification outside of North America pose potential risks and challenges.