Assume You Know Altria? This is 1 Little-Recognized Truth You Cannot Overlook.

When most traders have a look at Altria (NYSE: MO) what they see is a large 8% dividend yield backed by a dividend that has been elevated for years. That’s the kind of story that almost all dividend traders will discover engaging. However there is a huge threat right here as a result of the corporate’s core enterprise is in long-term decline. That threat needs to be understood, however there’s one other delicate twist that you might have missed.

Altria’s enterprise is slipping away

It should not come as any shock to Altria shareholders that the corporate’s most vital enterprise is making cigarettes. Within the first half of 2024, the corporate generated roughly $11.8 billion in income. Its smokeable merchandise division’s revenues had been about $10.4 billion, or 88% of the corporate’s general high line. Clearly, smokeable merchandise is the driving power at Altria.

Picture supply: Getty Photographs.

To be truthful, the corporate sells a wide range of smokeable merchandise, together with cigars. However once you have a look at quantity, cigarettes account for simply over 97% of the division’s quantity. So cigarettes are the massive story at Altria. However, as famous, most traders know that reality.

The vital story right here is not the most important enterprise. It’s the decline that is going down within the largest enterprise. By way of the primary six months of 2024, cigarette volumes dropped 11.5%. That is horrible and would probably be seen as surprising at every other consumer staples company — traders would run for the hills. Solely that drop is simply 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 thought, this can be a dying enterprise.

One “little” downside that may’t be missed

How has an organization with a enterprise that is in decline managed to take care of its dividend, not to mention develop it? The reply is that, due to the character of cigarettes, people who smoke are typically very loyal. So Altria has been jacking up costs frequently to offset the amount declines. That is labored out effectively thus far, however you may solely milk a money cow so exhausting earlier than it runs dry. That is an even bigger threat for Altria than many could understand.

Of the cigarettes Altria sells, solely about 4% or so fall into the low cost class. Meaning Altria’s enterprise is principally reliant on premium smokes. Within the premium class, “different premium” manufacturers make up about 4.5% of complete quantity. The remaining 91% of the corporate’s cigarette quantity is all attributable to at least one model, Marlboro.

Marlboro is a huge within the U.S. cigarette trade with an enormous 42% market share. This could possibly be seen as a energy. However step again for a second and take into consideration the massive image. Altria is principally a one-trick pony in a dying rodeo. And its pony is without doubt one of the most costly round at a time when worth competitors from smoking options is heating up. Altria itself notes that “the expansion of illicit e-vapor merchandise” is a giant downside, which is essentially as a result of they’re less expensive.

Fixing the issue will not be straightforward

There’s solely a lot Altria can do about its reliance on Marlboro because the cigarette enterprise declines. In actual fact, being the largest participant within the trade might be preferable to having a second rung model. What it’s doing is attempting to broaden its attain past cigarettes. That is the appropriate factor to do, however given the scale of the corporate’s cigarette enterprise it is not going to be straightforward to discover a substitute. After a few failed makes an attempt, together with an funding in Juul and in a marijuana company, Altria is presently centered on rising its current NJOY vape acquisition.

It’s going effectively, with NJOY experiences fast progress because it has been slotted into Altria’s spectacular distribution system. To place a quantity on that, within the second quarter of 2024 NJOY’s cargo quantity elevated 14.7% from the primary quarter and NJOY machine shipments elevated 80%. The issue is that NJOY is tiny, falling into Altria’s “all different merchandise” income class which made up simply $22 million in income within the first half of 2024 at an organization with almost $11.8 billion in income. So NJOY is barely even a rounding error. Marlboro is the important thing to Altria’s future and can probably stay the important thing for years to return.

If Altria hits a tipping level, it might get dangerous quick

A shopper staples firm can solely increase costs simply thus far earlier than there is a backlash from customers. The straightforward swap with cigarettes is to purchase cheaper smokes, which Altria actually would not promote. Then there’s options to fret about, similar to the corporate’s spotlight of vaping. Though Marlboro has been holding its personal, in 2021 its market share was 43.1%. That is 1.1 proportion factors above its present degree.

If Marlboro falters, Altria might fall. It is a “little” proven fact that many traders most likely aren’t contemplating as they have a look at the large dividend yield. Principally, there’s higher focus threat right here than many individuals understand.

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