Altria is a stock from the illustrious circle of the “dividend kings”. It is even so special that it has actually raised its dividend more than once a year over the past half century – 57 increases over 53 consecutive years. However, the last few years have been disappointing in operational terms. Recent results, in particular, have shown the direction this company is likely to take. There are still a few puffs left, but don’t be surprised by the impending dividend cut at this darling of many dividend investors.
Summary and key takeaways from today’s Weekly
– Altria is one of the infamous “dividend kings” and a dividend darling of many due to its 57 increases over 53 years. This makes it a base investment for many only looking at such achievements of the past.
– However, time is ticking. Competition is heating up, while at the same time cigarette volumes are under massive fire. They were supported so far by price increases, but this tool is getting more and more dull.
– What has worked in the past, won’t do so necessarily in the future. Be ahead of the curve and avoid disappointments.
Last week, I wrote an extensive article about dividend growth stocks and high yielding dividend stocks, showing some thoughts and calculations others either don’t care or even don’t know about. Should you have missed it, please read it, because there is basic knowledge in it many “dividend investors” don’t tell you (see here).
These pieces are essential to know in order not be disappointed down the road.
As fine as it is to work towards a safe, someday – maybe – higher yield with growth stocks, the results of my article, however, may have surprised many investors, especially those that blindly favored dividend growth over high yields and picked stocks mainly by series of consecutive increases – i.e. by its past performance.
I also mentioned the – for me obscure – titles “dividend aristocrats” as well as “dividend kings”. Stocks receive them when their underlying companies managed to raise dividends every year for at least 25 years or even 50 years, respectively.
Altria (ISIN: US02209S1033, Ticker: MO) – the Marlboro maker in the USA – is such a king with a seemingly juicy dividend yield of 8%. Maybe even THE king of the kings, as it even raised its payout more than once a year on average.
But with this article, I am going to demystify this legendary company. As addictive as its dividend history might be, you should not invest based solely on past performance. Altria today is just a shadow of its former glory.
While the headlines only cared to mention that adjusted earnings per share have risen and the outlook for 2023 seems fine, today, I am going deeper to the core through the most recent developments. You will read about the facts and figures that are really important for a proper assessment of the health of this company and its dividend.
You will get a big picture overview how Altria developed over the last years, learn about its big mistakes and finally see why its good old days are gone for good.
There are likely still some puffs to be made and the stock is even rising a bit.
Looking just at the PE number, some might even be tempted to load up the truck with this stock. But the outlook is rather bleak.
Take a deep breath, and let’s go for it.
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Altria – a slowly decaying dividend king
Altria is one of the most popular dividend stocks and at the same time one of the most hated companies in the public perception. However, it also has been one of the most successful stock investments of the last century – for those that held onto it.
Usually, I like hated companies and prefer them compared to hyped counterparts that are already priced to perfection. When something is out of favor, chances are high that not everybody is already invested.
But this works out only as long as the underlying case is storm resistant. Operations must be in good shape and financials healthy to gain my attention.
The formula of the past success for Altria was dividends and stock buybacks out of strong cash flows that were resistant to any economic downturns. At the same time, “Big Tobacco” was able to gain market share and increase revenues together with margins. A true buy and hold forever investment.
Its business model is easy and straight forward.
Producing and selling (mainly) addictive tobacco sticks that ensure customers come back on a recurring basis. With its flagship brand, Marlboro, it has a market share in the USA of now 42.5% (most recent results):
This is still a strong position many companies would like to have in their businesses.
However, with a declining trend.
Over the last nearly ten years, the market share of the iconic Marlboro brand has slowly declined (see the orange line), from its peak around 2015 / 2016 at 44%.
So did Altria’s other cigarette offerings (blue line for total market share):
The graphic above is from someone who already packed the numbers into a single chart based on publications from Altria. You see that since 2018 and also through 2021, Marlboro’s market share already was at a near ten-year low.
I checked older annual reports from Altria. While talking about record market shares in their 2010 annual report with 42.6% for Marlboro (on p. 10, see here), in 2013, they presented similar, slightly rising numbers.
So indeed, the peak must have been in 2015 / 2016.
44% for Marlboro and 51.4% for total cigarettes.
With their retail market share of 42.5% for Marlboro at the end of 2022 which was a decline compared to 2021, Altria broke even the level of 2010, now.
Although it seems just like small steps, it is a significant trend that is in motion. We will come back to it, soon.
Despite an ever decreasing number of smokers since the peak somewhere in the 1950s / 1960s, Altria and its competitors alike, managed to present record revenues, margins and profits (nearly) year after year.
Here is an overview of the development of revenues, net of sales tax (left axis) and operating margins (right axis) of Altria over the last ten years:
Both have been rising. Revenues, however, peaked in 2021. The question is whether temporarily or forever?
Likewise, dividends were increased steadily.
At least for now, Altria was able to circumvent an ever declining customer base.
You see in the graphic above that the number of cigarettes sold in the USA declined from more than 600 bn. sticks to just over 200 bn. During 2020 and 2021, the fall was stopped, temporarily.
All in all, tobacco companies managed to effectively mitigate the volume decline.
How did they do it? The main reason was price increases.
Because prices rose quicker than volumes declined, the results (and dividends) could be pushed higher and higher.
But with the latest results for the fourth quarter and full fiscal year 2022, Altria appears to have a very rough wind blowing in its face.
First, the headline financials, containing revenues:
We see that revenues, net of excise taxes, for the whole fiscal year 2022 went down by 2% and more or less stayed unchanged in Q4 compared to last year.
We see that Altria wasn’t able to grow revenues. That is the first point.
This is rather uncommon, because in the past Altria managed to increase its revenues. And it is somewhat worrisome because periods of high inflation – like we are in now – usually are occasions to strongly up revenues for companies like consumer staples or tobacco through price increases.
At least on a nominal basis.
The reason for these surprising or not results is of course further declining cigarette volumes. What are the numbers here? Let’s have a look:
A rather shocking picture.
Altria’s premium offerings declined by –8.3% to –9.1% (Marlboro) for the full year. Its discount products even nosedived by double of that.
And during Q4 this trend even accelerated as all categories posted double-digit declines.
These numbers were higher than overall industry declines:
Altria clearly lost heavily on market share.
To put all this into more context, I picked out the volume numbers from the 2013 annual report to compare how volumes have developed over a whole decade.
For me, the results are breath-taking (not in a positive meaning):
For a better overview, I put all the relevant numbers into an own table for you to compare 2012–2022:
|category||volume in 2012||volume in 2022||decline in %|
|Marlboro||116.3 bn.||75.4 bn.||– 35%|
|other premium||8.6 bn.||3.9 bn.||– 55%|
|Discount||9.9 bn.||5.4 bn.||– 46%|
Keep in mind that the declines accelerated recently, rather than smoothing slowly out!
To balance a volume decline of 35%, a price increase of more than 50% is necessary – just to keep revenues flat.
To balance a volume decline of 50%, a doubling in price is needed.
At the same time, there is an interesting development. The tobacco discount sector – measured as a whole – is growing:
This seems to make sense.
Already starting in 2021, but especially gaining traction during last year, prices rose as fast as history remembers. Many people did never experience such high inflation rates. In the USA, inflation was on a more than 40-year high. This shook many consumers and forced them to turn around every penny twice. Also the so far rather robust tobacco market wasn’t spared from this development.
But you have to look closely.
While Altria first presents its numbers and its own market shares, here in the last chart they show the industry numbers. But their discount market share suffered massively, because when Altria has double digit losses while the sector grows, they must have fallen further behind.
Likewise interesting is a number Altria presents in a separate document with metrics. In its Q1 2017 results, the price gap between a pack of Marlboro and the cheapest competitor was 29%.
The latest number, however, already shows a price gap of 41%.
Altria has raised prices faster for Marlboro than cheap competitors for their products. That is the reason why despite higher than industry declines, Marlboro only slowly declined in market share and Altria as a whole could present slightly rising revenues and margins.
At the same time, budgets for many people are tight. Do you think this is a good starting point for even higher prices? I have some doubts.
Furthermore, just simple math, with every additional decline, price increases have to be higher than the previous ones. As I said, a decline of 33% must be balanced by a price hike of 50%. Half the volume needs double the price.
Is it realistic that at this point prices have the potential to be raised even stronger than before? Or the other way: Volumes will be under massive fire.
Or won’t they?
And this leads me to the next section.
Will a pricing war for volume evolve?
With the above as background information and overview about the developments, what if suddenly – and certainly surprisingly for those unprepared – the tobacco companies started a pricing war to save their volumes for as long as possible?
So far, this has not been the case.
But having pressure from the natural volume decline due to less smokers on the one side and from outpricing oneself on the other, this won’t go well forever. You can have the highest prices, but when there’s no one to buy…
So far, Altria was preserving their revenues and cash flows with above-average price increases by sacrificing volumes.
Here, you see that their smokeable’s revenues didn’t move in line with volumes:
Just a thought experiment: If a price war breaks out, then Altria’s volumes will sink even more rapidly as they have. Altria is the leader in the premium category with more than 50% market share. Also, as shown above, the spread between a pack of Marlboro and the cheapest alternative, has risen to very high 41%.
At the moment, I don’t think that Altria would start a pricing spiral downwards themselves.
The Wall Street Journal is also questioning the massive breakaway of volumes and stresses that two things are happening currently: A switch to cheaper cigarettes and the push for alternatives.
Last week, British American Tobacco (ISIN: GB0002875804, Ticker: BATS), the number two in the US premium tobacco market, announced a volume decline of even 15%.
At some point, there will have to be a stabilization.
Because I don’t expect it to come from the customer’s side, the companies will be forced to stop it.
With this, let’s look at some other points that should be considered when looking at Altria as an investment.
More things to keep in mind about Altria
Recently, Altria sold its rights (for the US market) for the heat-not-burn device “iQOS” back to Philip Morris (ISIN: US7181721090, Ticker: PM) for 2.7 bn. USD.
Prior, Altria tried to launch iQOS on the US market, but the initial start was slow in some hand-picked markets. But then due to a patent dispute with BAT, an import ban was put in place. Hence, Altria was not able anymore to sell iQOS on the US market, because it wasn’t produced in the US.
Of the 2.7 bn. USD, a billion has already been paid. Altria was quick to announce a new share repurchase program of 1 bn. USD that will not even buy back 2% of shares outstanding, i.e. a shot in the wind.
Both companies, Altria and PM, agreed that starting from 2024, Philip Morris will enter the US market with its internationally successful heat-not-burn device and pay the rest to Altria. PM is already cannibalizing its own cigarette business, but earns higher margins and is nearly without serious competition in this field.
I can hardly imagine that with this new competitor, Altria will be able to continue acting like in the past. Altria so far has no similar offering, but is just developing and presenting its partnership with Japan Tobacco (ISIN: JP3726800000, Ticker: 2914).
I am not so sure whether this will be successful, as iQOS is already a known brand.
And compared to the current cigarette situation, where Philip Morris isn’t participating in the US market, an additional competitor joins the party that will put massive pressure on cigarette sales – not just for Altria, of course.
Also, PM bought recently Swedish Match that is the market leader in the US with its nicotine pouches and the market leading brand ZYN. On this front, PM already starts competing from now own, though not with a new product per se, because Swedish Match was already selling it in the US. Altria has an own product, but is lagging.
Then we have the acquisition-fiasco of Altria.
This wasting of shareholder’s money completely damaged its balance sheet in the sense that there is no more firepower for further takeovers. They have a net debt of 22.6 bn. USD – 2.8x their free cash flow of which 82% is spent on the dividend. The era of cheap debt is over for now.
Altria spend a double digit sum in the billions to buy stakes (not even the whole companies) in e-Vapor company JUUL and the cannabis firm Cronos (ISIN: CA22717L1013, Ticker: CRON) that both flopped.
At least, there is no dangerous short term refinancing risk. Until 2027, in no single year more than 1.6 bn. USD are due. They have about 1.5 bn. USD left after the dividend is paid, assumed that free cash flows don’t fall.
Free cash flows haven’t risen since 2020, either. But the dividend has. There is some more potential for one or two increases, just by the pure numbers of today.
But Altria will have to heavily sail against the wind, only to keep its current numbers.
This will be heavy enough.
Altria is one of the infamous “dividend kings” and a dividend darling of many due to its 57 increases over 53 years. This makes it a base investment for many only looking at such achievements of the past.
However, time is ticking. Competition is heating up, while at the same time cigarette volumes are under massive fire. They were supported so far by price increases, but this tool is getting more and more dull.
What has worked in the past, won’t do so necessarily in the future. Be ahead of the curve and avoid disappointments.
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