Altria's Shares Firmly Surged, Yet, Worth Investing In?
Altria's shares, represented by MO, have experienced a significant boost over the past year, exceeding a 30% increase in value. The third-quarter earnings of 2024 sparked considerable interest among investors, resulting in a substantial surge in the stock price post-release. However, the question arises, is Altria's business performance truly inspiring? To find an answer, one must delve a bit deeper into the financial figures. Yet, a brief scrutiny reveals that the long-term outlook might not mirror management's optimistic portrayal as fervently as they present.
What is Altria's core business?
To fully comprehend Altria's core operations, it's crucial to distinguish its main income sources. By the end of the first three quarters of 2024, Altria had garnered approximately $18 billion in revenue. Out of this, smokable products accounted for an impressive 88%, or $15.9 billion to be precise. These products predominantly include both cigarettes and cigars, with the former representing around 98% of the total volume. Furthermore, within cigarettes, the iconic Marlboro brand dominated at approximately 90% of the total volume. In essence, Altria operates as a high-class cigarette brand.
Emphasizing NJOY's vaping business
At present, Altria is giving significant attention to its newly acquired NJOY vaping business. In fact, this is the first venture that is exhaustively discussed in Altria's third-quarter 2024 earnings report. The logical reasoning behind this is quite straightforward. Given the recent acquisition, Altria has a strong motivation to showcase its advantages. And there indeed are some positives.
In the third quarter, NJOY's consumable shipment volume surged by 15.6% compared to the same period the previous year. Similarly, the shipment of NJOY devices witnessed an unprecedented increase of more than a hundred percent! Additionally, NJOY gained 2.8 share points more in its product category throughout the year. Although these facts are commendable, one must be mindful of the starting point. The impressive improvement in performance is only to be expected upon integrating NJOY into Altria's well-established distribution network. Essentially, the product's growth is noteworthy but not particularly surprising given the circumstances.
Persisting issues
It's crucial for investors to maintain a critical standpoint. The company is eager to showcase its strong points while working assiduously to downplay its challenges. While NJOY is an admirable achievement, its impact on Altria's income is insignificant. Indeed, NJOY generated earnings that are categorized under the "other" income category, representing a mere fraction of the third-quarter revenue. In reality, the revenues generated through NJOY are so minimal it's practically negligible, accounting for substantially less than 1% of the total revenue.
Regrettably, it appears that this significant growth in NJOY's performance did not translate into Altria's overall revenue gains during the first nine months of the year. Instead, overall revenue declined by 2.5% compared to the same period the previous year. The simple explanation is that most of Altria's revenue comes from premium cigarette brands. Thus, the performance of NJOY is not enough to offset the steady decline in cigarette sales.
Marlboro's slump
To put it into perspective, Marlboro's volume was down by 7.5% in the third quarter and had decreased by 9.4% throughout the first nine months of 2024. Alternatively, Altria's non-Marlboro brands performed even more dismally. The grim news is that even price increases could not negate the volumetric decreases experienced by Altria throughout the first nine months of 2024.
Not a reliable income stock
For income investors, the challenge is that Altria pays a substantial 7.5% dividend yield, which is a magnetic allure. However, the ability to maintain that dividend yield in the long term becomes increasingly uncertain given the continued slump in Altria's primary business. As Wall Street eagerly anticipates the rise of a prospective replacement product, it's important to consider how long this trend will continue, given that the promising NJOY segment is currently a mere fraction of Altria's core business.
In conclusion, investors are advised to monitor the stock closely. While there's no denying that the yield is tempting, potential investors should steer cautiously since the long-term sustainability of this high yield remains uncertain. Moreover, prospects for other profitable passive income sources are likely to be more rewarding for the majority of investors.
Given the current financial situation, investors might want to explore alternative avenues for investing their money, as the long-term sustainability of Altria's high dividend yield remains uncertain due to the declining sales in its primary business. Moreover, even with Altria's increased focus on NJOY's vaping business, the revenue generated from this segment is still a negligible fraction of the company's total revenue.
To maximize returns, investors might consider diversifying their portfolios, seeking out investments in industries with more promising long-term growth potential than that presented by Altria's core business of cigarette sales. This approach could potentially provide a more stable and reliable source of income over time.
