Predicting Altria's Position in the Next Three Years
Altria (-0.42%) holds the Marlboro brand, accounting for approximately 41% of the market in North America. This substantial share underscores Altria's prominence in this specific region. However, the drawback lies in its limited operation within this single geographical area. Historically, it's forecasted that Altria's tobacco business might continue to deteriorate over the ensuing three years.
Did Altria make a regrettable move?
A few years ago, Altria decentralizedPhilip Morris International as a distinct entity. Altria retained its North American operations while Philip Morris International gained control of the global operations. This strategic decision resulted in a corporation focusing on generating cash income (Altria) and another exploring growth opportunities (Philip Morris International). To be fair, this arrangement largely benefitted investors, as Altria presents a high-yielding dividend of 7.5% whereas Philip Morris International offers a more modest yield of 4.3%.
Unfortunately, there's some unfavorable news too. Altria's cigarette sales decreased by 10.6% during the first trimester of 2024. In comparison, Philip Morris International saw an increase in sales by 0.5% during the same duration. While a 0.5% increment isn't remarkable, it's significantly superior to Altria's considerable drop.
Upon examination of these numbers, it is evident that Altria divested the stronger component of its organization - the division that would have cushioned the decelerating sales in North America. On a more worrying note, Philip Morris International has now penetrated the North American market with non-tobacco nicotine products, an area of interest for Altria as they try to counterbalance their dwindling cigarette sales. In a sense, Altria unintentionally gave rise to a rival within its domestic turf when it spun off Philip Morris International.
How detrimental is it for Altria?
In 2020, when cigarette sales benefited from lockdown-induced consumer behavior, Altria's sales plummeted by 0.4%. This was a high-water mark, and the decrease in sales for 2021, 2022, and 2023 were 7.5%, 9.7%, and 9.9% respectively. Add the recent 10.6% plunge in sales through the first trimester of 2024 to this string of declines, and it becomes apparent that Altria's tobacco business is only worsening.
Prolong the 10% decline for three years from the 3rd quarter of 2024, and quarterly sales will fall from 18.2 billion cigarettes to roughly 16.4 billion by the 3rd quarter of 2025. Extend the decline to two years, and quarterly sales decrease to approximately 14.7 billion in 2026. After three years, the quarterly sales would decrease to around 13.3 billion in 2027. These estimates are rudimentary, but a 10% annual decline is undeniably alarming.
Investors have been buoyed by the company's acquisition of NJOY, a vape manufacturer. Altria has managed to rapidly expand the NJOY brand through its extensive distribution network. Nonetheless, the initial growth excitement is expected to subside after the anniversary of this acquisition. Moreover, the NJOY brand is far from capable of offsetting the notable declines in Altria's core tobacco business.
To add to the dilemma, Marlboro's overwhelming 41% market share sank from 43% at the end of 2020. This gradual decrease suggests that if the company is unable to curb the erosion of their market share, Marlboro's dominance could dip below 40% within the next three years. This fabled cigarette empire is steadily losing its grip on the market.
Altria's core business is besieged
Altria's substantial dividend yield might be salvaged for the time being, as the company has compensated for the sales reduction with price increases. However, the declining market share of the well-respected Marlboro brand indicates that this strategy may be nearing its end, as consumers increasingly shift towards more affordable nicotine consumption methods. In essence, repetitive price hikes might be exacerbating the volume issue. Even robust growth in the NJOY product is unlikely to solve this problem within the next three years.
If you invest in Altria primarily for its dividend, be sure to keep a close eye on the company. A critical juncture might be swiftly approaching that could imperil the sustainability of the dividend in the long term.
Given Altria's financial situation, it may be wise for investors to consider diversifying their portfolio by exploring other opportunities in the realm of finance and investing. For instance, they could look into investing in companies that are pioneering alternatives to traditional tobacco products, such as electronic cigarettes or nicotine replacement therapies.
Moreover, as Altria's tobacco business continues to struggle, it might be prudent for the company to explore new funding sources or consider reinvesting its profits back into research and development. By doing so, Altria could potentially develop innovative products that not only cater to the changing preferences of consumers but also help sustain its dividend yield in the long term.
