Altria Group: Buy, Sell, or Hold?
The S&P 500 has gained more than 26% in the last year. However, it's important to remember that not all stocks benefit from a strong market.
During this time, Altria Group (NYSE: MO) lost about 2%. Does this present a buying opportunity? Or should you sell the shares and invest that money elsewhere?
To make that determination, it's time to better understand Altria's business and prospects.
Declining business
Altria produces cigarettes, cigars, oral tobacco, and e-vapor products. While management spent $2.9 billion to buy e-vapor company Njoy, the company derives most of its top line from cigarette sales. And it has been selling fewer of them for some time.
Smokeable products generated $17.9 billion in revenue last year, not including excise taxes. That's down 1.6% from the previous year. By contrast, oral tobacco products had $2.6 billion in revenue.
Within smokeable products, Altria sold 76.4 billion sticks of cigarettes. That sounds like a lot, but the number has been falling, including by nearly 10% last year. While Altria's Marlboro product had a 42.5% share of the cigarette market in 2023, that's down from 42.9%, which management partly blamed on competitive forces.
These trends continued in the first quarter. And total revenue dropped 2.5%.
It's not a good combination when a company's core market is shrinking, and it's losing market share.
Dividend attraction
While Altria's top line has seen deterioration, it does generate a nice amount of free cash flow (FCF). Last year's FCF was $9.1 billion.
It uses a large portion of this FCF to pay shareholders dividends. These totaled $6.8 billion last year. The board of directors has also increased dividends annually for more than half a century, making the stock a Dividend King.
Its goal, set last year, is to increase payouts by mid-single-digit percentages. With an 81% payout ratio, it'll need to continue growing earnings to meet this target. That could present a challenge down the road if Altria doesn't also boost revenue.
The decision
Altria's stock valuation seems compelling. The shares trade at a price-to-earnings (P/E) ratio of less than 10. That's nearly one-third of the S&P 500's 28 multiple.
But it's tough to invest in a business that's contracting. And Altria's business certainly faces challenges that have hurt revenue. It's hard to see how the trend toward less cigarette smoking will reverse given the known effects and various programs aimed at curbing and preventing use.
Dividend investors may find the 8.6% dividend yield compelling. That's much higher than the S&P 500's 1.3%. The payments are a priority, and they look secure for now. But given the business's deteriorating revenue, the long-term outlook for dividends remains a question.
That's why I'd sell the shares. If you're looking for growth, there are certainly better alternatives given Altria's business and declining revenue. And if you want dividends, you can choose stocks whose products have steadier demand and a healthier long-term outlook.
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Lawrence Rothman, CFA 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.
Altria Group: Buy, Sell, or Hold? was originally published by The Motley Fool