Invest in Altria's High-Yield Stocks: A Flourishing First Half in 2024, but Exercise Caution for the Remainder of the Year
Dividend chasers might find themselves captivated by Altria's (MO -0.59%) soaring shares, which registered a 13% climb in the first half of 2024, matching the broader market's growth. However, it's crucial to scrutinize the company's underlying issues, as its bedrock business, the struggling cigarettes operation, may not have experienced any significant transformation during this period.
A Juicy, yet Troublesome Perk
Altria sports a substantial dividend yield of 8.5%, a tempting feature for prospective investors. Moreover, the dividend has been consistently augmented, signaling its stability. Regardless, the dividend's longevity remains uncertain in the long run.
The Achilles heel of Altria is the alarming decline in its traditional cigarette production. To quantify, the company's cigarette output tumbled from 116.6 billion in 2017 to 76.3 billion in 2023, marking a 35% decrease every year. Regrettably, the downward spiral of smoking appears unrelenting, posing a major challenge to the company.
Altria's coping mechanism has been to instigate price hikes to compensate for the dwindling sales volume. This tactic sustained the dividend, but it arguably loops back to exacerbate the downfall. The company must seize the opportunity to grow a new business to counterbalance these losses.
Could NJOY Be the Savor of the Day?
To that end, Altria entered the world of e-cigarettes, inking deals with vape manufacturers Juul and a marijuana cultivator. Unfortunately, these ventures proved to be pricey missteps, culminating in multibillion-dollar write-offs for the shareholders. Nevertheless, the company understands their predicament and has attempted to rectify it with the acquisition of vape maker NJOY for approximately $2.75 billion.
When compared to Juul's stage of development at the time of Altria's initial investment, supplies for NJOY appear more advanced. This suggests that the outcome reaped from NJOY's acquisition may prove to be improved. In fact, in the first quarter of 2024, NJOY obtained FDA authorization for menthol-flavored vape products, offering a glimmer of possibility for success.
However, investors should grapple with the scale of the challenge Altria confronts. In the first quarter of 2024, the tobacco sector, which mainly comprises cigarettes, raked in $4.9 billion in sales, accounting for around 88% of its total revenue ($5.6 billion). This demonstrates that even if NJOY triumphs, the maximum it could achieve is offsetting the cigarette business's losses. Given that the cigarette industry is so substantial, it might take several years for Altria's alternative businesses to pose a robust countermeasures to the shrinking cigarette market.
Be Wary, and Exercise Caution
Dividend enthusiasts may find Altria's stock alluring, but it's vital to refrain from permitting short-term price increases to fool you into assuming that the company has undergone a groundbreaking change. The behemoth cigarette division remains its central concern, and it is still scaling down.
In the second half of 2024, cigarette volumes are likely to continue their steep descent. If you aspire to establish a reliable income stream to finance your retirement, it's essential to monitor the cigarette sales trends as these will dictate Altria's ability to maintain its dividend payments equivalent to its passive income requirements.
Investors looking to diversify their finance portfolio might consider Altria's foray into the e-cigarette market as a potential avenue for investing money, with the acquisition of NJOY offering a promising start. However, it's important to remember that the tobacco sector, which predominantly contributes to Altria's revenue, continues to shrink, making the company's reliance on its cigarette business a significant risk in finance terms.
