Shares of Altria(NYSE: MO) have had a great run over the past year, gaining more than 30% in value. Third-quarter 2024 earnings got investors particularly excited, with the stock rallying sharply after the release. But is Altria’s business really that good? To answer that question you need to dig into the numbers a little bit. But you only have to scratch the surface before you realize that the long-term picture may not be as good as management wants you to believe.
It is important to step back and understand the core business in which Altria operates. Through the first nine months of 2024, the company generated roughly $18 billion in revenue. Of that total, smokable products brought in $15.9 billion in revenue, or about 88% of the total. Smokable products include both cigarettes and cigars, with cigarettes accounting for about 98% of volume. Within cigarettes, the Marlboro brand accounted for just over 90% of volume. All this leads very clearly to the fact that Altria is a high-end branded cigarette company.
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But right now, Altria is spending a lot of time highlighting the NJOY vaping business it recently acquired. It is the first “division” that is discussed in any detail in the company’s third-quarter 2024 earnings release. It makes sense that Altria would highlight the positives. And there are major positives with NJOY, but you have to take them with a grain of salt.
For example, in the third quarter, NJOY’s consumables shipment volume rose 15.6% compared to the same quarter a year ago. NJOY devices shipments rose more than 100%! And NJOY gained 2.8 share points year over year in its product category. That’s all very good news, but NJOY is working off of a small base. A swift improvement in performance is to be expected just from plugging NJOY into Altria’s distribution system alone. Put another way, the product’s growth is good news, but given the situation it isn’t surprising news in any way.
MO Chart
This is where investors need to be more discerning. The company is cheerleading its best attributes as it attempts to downplay its worst ones. And while NJOY is a bright spot, it is so small that the income it generates is classified in the “other” category. The “other” category on the income statement, for reference, accounted for much less than 1% of revenue in the third quarter despite all of that growth at NJOY management told investors about. It isn’t even a rounding error.
In fact, all of that growth at NJOY seemingly didn’t help Altria’s top line at all through the first nine months of the year, since overall revenue declined 2.5% year over year in that span. The reason is really simple to understand, too, when you look at where most of Altria’s revenue is generated. This is still a premium cigarette company. Period. Hard stop. NJOY is a great story, but it just isn’t meaningful at this point, and it will likely be a long time before it is meaningful enough to offset the ongoing declines in the company’s cigarette business.
To put a number on the declines, Marlboro volume was down 7.5% in the third quarter and was off by 9.4% through the first nine months of 2024. Altria’s non-Marlboro brands performed even worse. But here’s the big takeaway — even regular price increases weren’t enough to offset the hit from volume declines through the first nine months of 2024.
The problem from an investor’s point of view is that Altria pays a huge 7.5% dividend yield, which is like a siren call to dividend investors. It can support that yield for now despite the ongoing declines in its most important business. But long-term dividend investors need to ask how long this can last given that the replacement product Wall Street is so excited about is still just a tiny part of Altria’s business.
If you do decide to buy Altria, make sure you follow the stock like a hawk. Most investors, however, will probably be better off looking elsewhere for reliable passive income.
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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.
