3 Things to Know About Altria Stock Before You Buy

Altria 's (NYSE: MO) large 7.9% dividend yield is probably the key thing that will attract investors to the stock today. However, in the consumer staples space, yields don't often get that high without a very good reason (or more accurately a very worrisome reason).

Before you buy Altria stock for the income stream it can create, step back and consider these three facts.

1. Altria's most important business is in decline

In the first quarter of 2024, Altria's smokeable products division, which is largely made up of cigarette sales, produced revenue of $4.9 billion. That's roughly 88% of the company's total revenue of a little under $5.6 billion. Cigarettes are the driving force at Altria.

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This is a big deal because the volume of cigarettes that Altria produced fell 10% year over year in the first quarter. A one-time drop like that should alarm investors. But the real problem is that this is just a continuation of a longer-term trend. In 2023, volume shrank 9.9%. In 2022, volume was down 9.7%. I could continue, but the idea is pretty clear: Altria's most important business is in a secular decline. Thus, there is a huge amount of risk involved in owning the stock.

2. Altria can only raise prices for so long

So how does a consumer staples company like Altria manage to keep raising its dividend every year if it is selling fewer and fewer products? The answer is that Altria has been increasing prices. Given the addictive nature of nicotine, customers tend to be fairly loyal. So Altria has been able to use this approach for a long time. But there's likely a limit to how long this can continue, then the price increases will just exacerbate the decline.

That limit could already be here. Altria has started highlighting the rise in "the growth of illicit e-vapor products" when it discusses slumping volume. The reason this is so worrying is that illicit e-vapor products are effectively a lower-cost alternative to full-price smokes. In other words, Altria could be at a point where it has to deal with what amounts to greater price competition, and that could limit its ability to keep raising prices even as volume continues to fall.

3. Altria has a bad track record with big strategic moves

Managing the declining cash-cow segment is one side of the equation for Altria. The other side is trying to find new businesses that it can grow in an effort to replace cigarettes over time. So far, Altria hasn't done a particularly good job on this front. An investment in vape maker Juul ended up with a massive write-down. Similarly, an investment in a marijuana company didn't work out well and cost shareholders billions in write-downs.

Then there was the decision to split off Altria's foreign operations into a separate company called Philip Morris International (NYSE: PM) . Philip Morris is now entering the U.S. market with non-cigarette products, so Altria effectively created a new competitor for itself. This string of missteps should be enough to make any investor worry about management's strategic decision-making.

MO data by YCharts

The most recent investment in vape maker NJOY seems like it is on more solid footing. However, it is still just a small business compared to cigarettes, so even if NJOY works out well, it probably won't do more than offset a portion of the falling cigarette volume. Simply put, Altria has a lot to prove, and so far it hasn't done a good job of addressing the concerns that could be keeping conservative income investors up at night.

Lots of income and lots of risk at Altria

Altria has a large and important cigarette business in the United States. It is milking that cash cow hard as it tries to find a replacement for the declining cigarette operation. If you buy Altria, you are making a bet that it can figure out a way to manage -- and eventually offset -- that shrinking segment while continuing to support and grow its dividend.

The big risk is that management falls short of that goal and the dividend ends up being cut. If you can't handle that potential outcome, you should probably avoid high-risk Altria.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy .