Altria Faces Declining Cigarette Volume Amid Market Challenges

Altria (NYSE: MO) is known for the Marlboro brand, which holds a significant 41% market share in North America, underscoring its strong position in the region. However, the company operates solely in this area, leading to concerns that its cigarette business could face ongoing declines over the next few years.

Cautionary Moves: Altria’s Strategy Questioned

A few years ago, Altria decided to spin off Philip Morris International, creating two separate companies. Altria focused on North America, whereas Philip Morris International took charge of international markets. This move resulted in Altria operating as a steady income source while Philip Morris International pursued growth opportunities. Investors have benefitted from Altria’s high dividend yield of 7.5%, contrasting with Philip Morris International’s lower yield of 4.3%.

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Unfortunately, the latest trends reveal troubling news for Altria. The company’s cigarette volume dropped 10.6% in the first nine months of 2024, while Philip Morris International’s volume increased by 0.5%. While a 0.5% increase may not seem impressive, it highlights the stark difference compared to Altria’s decline.

This situation underscores that Altria separated from a potentially beneficial part of its business—one that could have balanced out the declines in North America. Additionally, Philip Morris International has entered the North American market with non-cigarette nicotine products, creating competition for Altria as it seeks growth in similar categories.

Altria’s Challenges Intensify

In 2020, Altria saw a mere 0.4% drop in cigarette volumes due to pandemic-related lockdowns. However, this was a temporary high, as subsequent years brought declines of 7.5%, 9.7%, and 9.9% in 2021, 2022, and 2023, respectively. The current drop of 10.6% through 2024 further illustrates the worsening condition of Altria’s cigarette business.

If these declines continue at the same pace, analysts estimate that quarterly volume could fall from 18.2 billion cigarettes in Q3 2024 to around 16.4 billion by Q3 2025, dropping to approximately 14.7 billion in 2026, and further down to about 13.3 billion in 2027. While these projections are rough estimates, they clearly signal a troubling trajectory for Altria.

On a more hopeful note, Altria’s acquisition of NJOY, a vape maker, has shown rapid growth through its established distribution channels. However, this growth might diminish as the novelty of the acquisition fades, and the NJOY business is not substantial enough to counterbalance the significant declines in Altria’s primary operations.

Marlboro’s market share has also decreased from 43% at the end of 2020 to its current 41%, suggesting a steady decline. If this trend continues, Marlboro could fall below a 40% share within three years, reflecting Altria’s diminishing dominance in the cigarette industry.

Altria’s Future Remains Uncertain

For now, Altria’s dividend yield may remain safe as the company manages to offset volume declines with price increases. However, the decline in Marlboro’s premium market share indicates that this strategy may soon reach its limits, with consumers likely opting for more affordable nicotine alternatives. As a result, increasing prices could exacerbate the downturn in volume. Despite some promising growth from NJOY, the underlying issues in Altria’s core cigarette business suggest long-term challenges.

If you are considering investing in Altria for dividends, close monitoring of the company is essential. A critical point may be approaching that could threaten the sustainability of its dividend in the long run.

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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.

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