Altria(NYSE: MO) was once considered a stable dividend play for conservative investors. It's the largest tobacco company in America, it generates steady earnings growth, and it's raised its dividend every year since it spun off its overseas business as Philip Morris International(NYSE: PM) in 2008.
But over the past five years, Altria's stock has declined 20%. Even after reinvesting its dividends, it only generated a total return of 16%. The S&P 500 index rose 54% and produced a total return of 68% during the same period. Let's see why Altria woefully underperformed the market -- and if it's the right time to buy, sell, or hold its stock.
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Why did Altria's stock stumble?
Altria struggled with declining smoking rates in the U.S. over the past several decades, but it consistently offset that pressure by raising its prices, cutting costs, and plowing most of its cash into buybacks and dividends to appease its investors. But that strategy is unsustainable over the long term -- and the cracks have grown larger over the past few years.
Between 2017 and 2022, Altria's cigarette shipments fell from 116.6 billion sticks to 84.7 billion sticks. The retail market share of its flagship brand Marlboro shrank from 43.3% in 2017 to 42.5% in 2022 as the broader market withered.
Its revenue (net of excise taxes) still grew at a compound annual growth rate (CAGR) of 4% during those five years as it aggressively hiked its prices to offset its falling shipments. Its stable sales of non-cigarette products -- including cigars, snus, nicotine pouches, and e-cigarettes -- further cushioned that blow. Its adjusted EPS rose at a CAGR of 7% as it cut costs, divested its non-core assets, and bought back about 5% of its shares.
Those growth rates weren't too shabby, but the main concern is that Altria is running out of ways to grow its revenue and profits -- and its clumsy attempts to expand its business beyond traditional cigarettes aren't inspiring much confidence.
What are Altria's plans for a post-cigarette market?
Altria once sold its own MarkTen and Green Smoke e-cigarettes, but it discontinued both brands in 2018 and acquired a 35% stake in the domestic market leader Juul for $12.8 billion instead. Unfortunately, the value of that investment withered after the U.S. Food and Drug Administration (FDA) banned all of Juul's products last year.
Altria also partnered with PMI to sell its iQOS heated tobacco products, which heat up tobacco sticks instead of burning them, in the U.S. market. But that deal ended this April after PMI bought out Altria's share for $2.7 billion.
After taking a massive writedown on its stake in Juul, Altria shifted gears once more and acquired the e-cigarette maker NJOY -- which already had its existing products cleared by the FDA -- for $2.75 billion on June 1. Upon closing that deal, the company reduced its full-year adjusted EPS outlook from 3%-6% growth to just 1%-4% growth to account for the acquisition-related costs. It expects the deal to be accretive to its cash flow in 2025 and accretive to its EPS in 2026.
In other words, Altria's investors will need to brace for two more years of sluggish revenue and earnings growth as Altria resets its e-cigarette business again. They should also expect its cigarette shipments to continue declining as Marlboro's market share shrinks. Inflation and other macro headwinds will also exacerbate that pressure by curbing consumer spending.
Altria's stock is dirt cheap for obvious reasons
At $45, Altria trades at just nine times its adjusted EPS forecast for 2023. It also pays a massive forward dividend yield of 8.5%. By comparison, PMI's stock trades at 16 times forward earnings and pays a lower forward yield of 5.6%.
But Altria's stock is dirt cheap because its long-term outlook is so murky. Unlike PMI, which can still sell more cigarettes in overseas markets with higher smoking rates, Altria is locked into the declining U.S. market. Altria also repeatedly fumbled its expansion beyond cigarettes while PMI smoothly expanded iQOS across multiple regions.
If you already own Altria, then you might want to hold the stock for a bit longer, collect its dividends, and see if its acquisition of NJOY pays off. But if you don't already own Altria, there's no compelling reason to buy it right now -- especially when so many other higher-quality blue-chip dividend stocks are still on sale.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
