HomeMarket NewsAltria Group: Buy, Sell, or Hold?

Altria Group: Buy, Sell, or Hold?

Daily Market Recaps (no fluff)

always free

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.

Someone looking at charts on a laptop.

Image source: Getty Images.

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.

Should you invest $1,000 in Altria Group right now?

Before you buy stock in Altria Group, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Altria Group wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $566,624!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of May 13, 2024

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Do you want a daily market summary with no fluff?

Simple Straightforward Daily Stock Market Recaps Sent for free,every single trading day: Read Now

Explore More

Simple Straightforward Daily Stock Market Recaps

Get institutional-level analysis to take your trading to the next level, sign up for free and become apart of the community.