No stock is perfect, which is why investors need to always think about the risks when making an investment. Right now, B&G Foods(NYSE: BGS), which recently cut its dividend, may appear to be a lousy investment choice. And Altria(NYSE: MO), which has increased its dividend for over a decade, might look like a good one. But the risks involved with each of these consumer staples stocks change the equation in a big way.
Altria has a tough outlook
Altria has a huge 8.4% dividend yield. The dividend has been increased annually for 14 consecutive years. So far, that sounds pretty solid. The problem arises when you look at the company's main product, which is cigarettes.
Image source: Getty Images.
Smoking causes cancer, and the number of smokers has been in decline for years. Altria, which owns the industry-leading Marlboro brand in the United States, is well aware of this. To offset the decline in smokers, it has been steadily increasing prices, focusing on cash flow and returning value to investors via dividends. It's a typical cash cow approach and makes a great deal of sense. However, at some point higher prices and a falling customer count will likely turn into a downward spiral that management won't be able to get out of.
That's why Altria has been desperately looking for alternative products to sell, including in the vaping and marijuana arenas. Again, it is a good plan to use a slowly dying cash cow business to invest in new growth engines. The problem is that Altria's efforts so far have been disastrous, leading to billions of dollars in write-downs. Put simply, it has been a poor steward of shareholder capital. The company is back at it again, however, recently inking a multi-billion-dollar deal to buy NJOY, another vaping company.
Maybe it'll work out better this time. But given the history, most investors will probably be better off avoiding Altria until it has proven it can find a sustainable growth platform to replace what is otherwise a slowly dying business.
B&G seeks to get back on track
As an alternative, more aggressive investors might want to consider B&G Foods and its 5% dividend yield. However, that dividend was cut 60% in the fourth quarter of 2022. That might turn off more conservative investors, which is probably appropriate, but there are still some reasons to like this food maker.
For starters, it uses a unique approach that involves buying unloved brands from larger companies and upstart brands. It then invests in these brands, via innovation, advertising, and distribution, to increase sales. In some ways it is like a partner to the giant consumer staples companies that dominate the grocery store. It has a fairly strong history of success behind it, with its purchase of Pirate's Booty for $195 million in 2013 -- and subsequent sale of the brand to Hershey for $420 million in 2018 -- a prime example of what the company is capable of doing.
The problem is that buying and selling food brands takes money, and B&G Foods has a highly leveraged balance sheet. As interest rates spiked over the past year, carrying that debt load got a lot harder -- thus, the dividend cut. However, the long-term business model of opportunistically buying food brands is still intact. For long-term investors with a bit more risk tolerance, that's probably a better option than owning a company with a business that's in long-term decline.
Be selective with the risks you face
To be completely fair, conservative investors should probably avoid both Altria and B&G Foods. They are both higher-risk stocks that require careful tracking. But, if you are looking at Altria, attracted by its lofty yield, you might want to consider B&G Foods as an alternative. Its yield is lower following a dividend cut, but that cut should put it on a much stronger footing than it was on before. And its business isn't slowly going away, which is exactly what's happening to Altria's cigarette operations.
10 stocks we like better than Altria Group
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Altria Group wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of April 10, 2023
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
